Archive for April, 2009

The other meeting in Latin America

April 20, 2009
Interamerican Development Bank 50th Anniversary Meeting in Colombia last month
Interamerican Development Bank 50th Anniversary Meeting in Colombia last month

The Summit of the Americas in Port of Spain, Trinidad included the much-publicized American initiative to open up to Cuba.  President Obama continued to present his new, more acceptable face of America, put forth with grace since his inauguration in January.  He even unleashed his charm offensive against Venezuela’s irascible and mercurial Hugo Chavez, joking and smiling with him for the cameras, united perhaps in their unrelenting criticism of Obama’s predecessor, though Obama never quite used the term “el diablo.”

Yet the less-publicized hemispheric meeting took place at the end of March in Medellin, Colombia, the occasion of the 50th anniversary meeting of the Board of Governors of the Interamerican Development Bank (the IDB or BID, according to its Spanish or Portuguese acronym), the regional multilateral lender that comprises 48 countries, 27 Latin American and Caribbean nations that borrow, and the rest, including the U.S., Asian and European countries, that lend.

The meeting, which included appearances by U.S. Treasury Secretary Geithner and former U.S. President Clinton, concluded with a call by the Board for a capital increase to help member countries weather the global financial crisis.  Why not?  The IMF did so well at the G-20 meeting last month.  Of particular interest to readers are two research reports released by the IDB discussing the economic and social impact of the financial crisis on the economies of the region.  Likewise the IDB publishes LatinMacroWatch, data tables for 26 member countries.

China made its presence known, its first official presence at the IDB annual assembly, with a speech by its central bank governor and two of its state banks signing project finance agreements with the IDB.  My colleague Chris Herbert discusses China’s initiatives in the region in more depth in a recent Rising Powers post.

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China: Can the CCP Lose its Monopoly?

April 15, 2009
Chinese Riot Police in Sichuan Province in 2008.  Source: AFP

Chinese Riot Police in Sichuan Province in 2008. Source: AFP

Most communist regimes (most dictatorships for that matter) have been swept away by history, usually when they failed to deliver the goods on economic growth and social welfare.  Democracies contain elaborate rules by which the people can “throw the rascals out” when their leaders fail to deliver.  True, when enough people blame the democratic system itself, rather than just the rascals, democracies have been overturned as well.  Weimar Germany comes to mind.  

In spite of the great sweep of communist regimes into history’s dustpan, the Chinese Communist Party (CCP) has hung on and even prospered.  It has delivered the goods, producing a mindboggling 10% annual growth in GDP on average over the last thirty years.  The Chinese people have acquiesced to the CCP’s continued monopoly of political power, because, well, business has been good.

Yet China’s leaders are nervous.  They are nervous about the global economic crisis.  They are nervous about rising unemployment.  They are nervous about popular protests.  They are nervous about the internet, that discontent can spread like wildfire with the click of a mouse.

Some China analysts have warned, since Deng Xiaoping began liberalizing the economy, of the inherent contradiction of a society with economic diversity and a political monopoly.  Yet years of economic success postponed a resolution of this conflict. 

This is not to say that the day of reckoning is near.  The situation in China right now is not that bad.  The economy is expected to grow between 5-6% this year, below the 8% some economists have argued is needed to absorb the growth in the labor force, but not bad for the middle of the worst global crisis in decades.  Foreign exchange reserves are nearly US$2 trillion and rising, providing plenty of room to stimulate the economy without balance of payments pressures. Likewise, with government debt at around 25% of GDP, there appears to be a lot of room to spend money.

Scratch below the surface and all is not well in the Forbidden City.  Reports indicate some 670,000 factories have closed.  Unemployment, while nationally at a low 4.5% by official reports, may be much higher in rural areas (estimated at 15%), among college graduates (estimated at 12%), and among the migrant workers who man the machines in China’s coastal manufacturing juggernaut (estimated at around 26 million jobless).  The latter two groups, China’s leadership worries, could foment social unrest.  This year, after all, is the twenty-year anniversary of Tiananmen Square. 

Substantial income disparity can exacerbate social tensions in China.  While the country’s per capita income exceeds US$3,000 overall (similar to Tunisia’s and Peru’s), wealthy Shanghai’s income per head is closer to what we find in Chile, Turkey or Malaysia, while the poorest provinces have income levels found in the poorest African nations.  At 46.9, China’s Gini index demonstrates poor income distribution.

The massive macroeconomic stimulus the Chinese are implementing may not durably replace the external demand lost due to the global crisis.  China’s economy is distorted.  Consumers save too much.  Production is directed for export due to the undervalued exchange rate, reducing the supply of low-cost goods for consumption at home.   Ironically, in the planet’s largest socialist nation, the government fails to provide an adequate social safety net, causing consumers to save for health care, housing, education and retirement, thereby postponing consumption.

The stimulus package focuses too much on infrastructure investment in a country where investment represents an excessive 43% of GDP and infrastructure in the coastal cities is already world-class.  With investment rates this high, one wonders if the marginal return on investment could be low or even negative, as some economists argued was the case in Korea as it over-invested in the run-up to the Asian crisis, and in the Soviet Union during its dying days.  The stimulus package contains elements to bolster consumption, but perhaps more should be directed here, providing an effective short-term boost to the economy and fostering the longer-term adjustment needed for a stable domestic source of aggregate demand.  It took an externally-driven crisis to convince China’s leaders to do what the West has counseled for years, namely, stimulate domestic demand.

James McCormack, Head of Asian Sovereign Ratings at Fitch Ratings, in a March 2009 report on China  (www.fitchratings.com), notes that the fiscal stimulus plan “may not adequately address the issue of large-scale unemployment in export-oriented manufacturing.”  He adds:  “Chinese fiscal stimulus and monetary easing can help offset some of the effects of the economic downturn, but they cannot change the course of the economy, especially one in which exports of goods and services were equivalent to 37% of GDP in 2008.”  If the downturn in advanced economies persists, the stimulus package would have to be redirected toward greater household income support.

Another problem with the stimulus package is that it is channeled through public institutions, such as ailing banks and state-owned enterprises, rather than directed toward the dynamic, privately-owned manufacturers.  Moreover, local governments are expected to foot part of the bill, yet they rely on land sales for a large portion of revenues, under pressure from falling real estate prices.  As for the banks, the good news is that they do not need to de-leverage as banks are doing in advanced economies.  According to McCormack’s report, Chinese banks have a modest loan-to-deposit ratio of 66%.  However, Chinese banks, long involved in questionable lending, are weak and sprawling, with assets representing a sizable 128% of GDP.  Although the government’s debt burden is low, it may have a bank cleanup to finance in the coming years.  On orders from the government, Chinese banks are engaged in rapid, indiscriminate lending.  The government, with a low tax intake, may have to expand the tax base in order to support its current policy stance.

Should stagnation persist in the advanced economies, which have been the engines of Chinese growth, then unemployment and social distress in China will increase and the Chinese people will want a change.

Elizabeth Economy, Director of Asia Studies at the Council on Foreign Relations, addressing a political salon in New York this week, following a week-long visit to China, said she was encouraged by the lively debate taking place in China today over economic policy.  She noted, however, that the leadership remains reluctant to discuss any substantive political opening.  Chinese leaders worry about rising unemployment, especially among migrant workers and college graduates, because they know that, lacking avenues of popular expression, the people could take to the streets.  Yet instead of building or broadening institutions to channel social action, China’s leaders reach reflexively for the tried and true answer, that is, to give the masses the opiate they desire:  economic growth.

John Thornton, Chair of the Board of the Brookings Institution and a professor in Beijing, discussed signs of democratization in China in an excellent article in Foreign Affairs last year.  He enumerated examples of competitive elections at the local level and greater competition within the CCP itself, as well as improvements in judicial independence and governmental oversight.  Notwithstanding these healthy developments, Elizabeth Economy suggested that democratization in China thus far is more anecdotal than systemic.  Should a sustained downturn produce popular dissatisfaction, one cannot rule out trouble for the CCP or even an up-ending of the regime in the manner we have seen in other communist countries and other dictatorships.

More on war…and peace…

April 12, 2009
President Obama meets Iraqi Prime Minister al-Maliki  Source: AFP
President Obama meets Iraqi Prime Minister al-Maliki Source: AFP
President Eisenhower and Nikita Krushchev (and Nixon)  Source: PBS
President Eisenhower and Nikita Krushchev (and Nixon) Source: PBS

President Obama said back at the end of February that all U.S. troops will be withdrawn from Iraq by the end of 2011, with most out by August 2010.  His policy is to pull out of Iraq and take American power instead to Afghanistan and Pakistan in order to root out Al Qaeda and do some nation-building there.  There will be ramifications of this policy shift.   One risk, highlighted by those on the right and in a weekend New York Times article, is that the successes of the surge, namely the build-up of the Sunni Awakening Councils that took back Sunni strongholds from Al Qaeda, could be reversed. 

The Shiite-dominated Iraqi government has allegedly ramped up arrests of Awakening leaders, while U.S. forces stand by.   President Obama’s policy could leave the Iraqis to slug it out, as perhaps they should.  But, nonetheless, let us be clear on what the ramifications of this policy shift might be:  increased bloodshed and instability in Iraq; Shiite dominance in a sizable power so close to Iran and the Gulf; and, possibly a resurgence of Al Qaeda in the Sunni areas.

General Raymond T. Odierno, America’s top commander in Iraq and a key architect of the surge, weighed in on the issue and with his opinion of President Obama this weekend on John King’s State of the Union:

“He’s our commander-in-chief,” Odierno said.  “As our commander-in-chief, we take direction from him.”  He added:  “He’s very attentive. He listens. He’s incredibly intelligent. He talks through the issues. . . .He makes a decision and then we execute those decisions and that’s all you can expect out of your commander-in-chief. And I’ve been very pleased with the interaction that I’ve been able to have with him.”

In a New York Times column this weekend, Jean Edward Smith argues that President Obama, in handling Iraq, should take a page from President Eisenhower’s decision to end the war in Korea in 1953.  Eisenhower, in spite of the hawks in his own party, decided to negotiate an armistice at the 38th Parallel with the communist adversary.  With 150,000 U.S. war dead, America and the West would reap no gain, nor the flip side, inflict no punishment on the communist aggressor.

Just like Obama did in Iraq last week, Ike went to Korea and had a look for himself and decided it was a stalemate.  When South Korean President Rhee tried to derail the talks with the north, Ike threatened to pull out of Korea entirely, which would have left Rhee to face the communist onslaught himself.  U.S. troops, though reduced in recent years, remain in Korea to this day.

The parallel that Smith makes between Ike and Obama is not compelling.  What the Obama administration plans for Iraq is more akin to the threat Ike made to Rhee (to pull all U.S. troops out) than it is to the Korea policy followed by successive administrations since 1953.  That is, to maintain a U.S. troop presence to help secure South Korea from aggression.  Smith makes a good point that only Ike, the former Supreme Allied Commander in Europe in World War II, could have pushed through such an armistice in Korea.  Had Truman tried this, he might have been impeached.  While President Obama doesn’t have the military stature that Ike had, his Iraq policy is broadly popular.

Ike and Truman both sought a measured response in Korea.  They both sought to contain the extension of communism without triggering a world war with China and the Soviet Union.  MacArthur and others on the Republican right wanted to take the war to the Chinese. (Ike’s Secretary of State John Foster Dulles even said the Chinese required “one hell of a licking.”)  Kissinger has argued that the best scenario for U.S. interests would have been something in between what Ike and Truman sought and what the right wing aspired to.  He has argued that U.S. forces should have moved, early in the war, not to the border with China at the Yalu River, which MacArthur did, triggering a massive Chinese response, but to one hundred miles south of that, at the “narrow neck” of the Korean peninsula, a defensible position where the country would have been nearly reunified, with 90% of the population and the capital of the north behind allied lines.  This way the U.S. would still have avoided threatening China, but would have secured a non-communist reunification of Korea.  We wouldn’t have this pesky nuclear arms mess with North Korea today.  But there are no sure bets in war and peace: there is no certainty that the Chinese would have tolerated even Kissinger’s scenario.

Perhaps President Obama should endeavor to find Kissinger’s middle ground in decisions on where to apply U.S. military power.  Reap the maximum advantage without threatening the major powers.  Easy to write, much harder to do.  That’s why I blog…

Military force: Use it and lose your soul

April 6, 2009
IDF soldiers in Gaza during Operation Cast Lead   Source:  Haaretz
IDF soldiers in Gaza during Operation Cast Lead Source: Haaretz

Political scientists study the power of states, looking at the linkages between a society’s economic and political strengths and its capacity to use or threaten military force.   The assessment of a country’s power is made relative to other states in the international system.  Yet the use of military force itself is tricky, because it can subvert the very values that underpin the strength of a people.  Just wars are fought, true, but as Leon Wieseltier of The New Republic said in a recent article, “no just wars are fought only justly.”  He adds, “No state was ever innocent, but not all states are evil.”

History and headlines are full of immoral military actions.  U.S. troops have allegedly committed them in both Iraq and Afghanistan.  Those of us who remember the Vietnam War remember the My Lai massacre.  Going back further, many label the R.A.F.’s firebombing of Dresden in its effort to break Germany’s will a significant moral lapse.  Russia’s actions in Chechnya, Turkey’s against the Kurdish PKK, India’s in Kashmir, all warrant examination.  Rising Powers must deal with this question of morality and the use of military force, increasingly as they rise.

Israel was roundly criticized for Operation Cast Lead in Gaza earlier this year, bearing a very serious diplomatic cost, not to mention the agonizing ethical issues the country faces.  Fighting terror organizations in densely populated cities will by definition involve the unintended killing of civilians.  The argument that the IDF, with enemies on three sides embedding combatants where civilians live, has performed more ethically over the years than almost any other national army would in similar circumstances, while not proveable, may have some merit.  Nevertheless, the Israeli newspaper Haaretz has begun to publish IDF soldiers’ accounts of serious lapses in the conduct of the war in Gaza.  Wieseltier in his article rightly bemoans a “coarsening” of Israel’s conscience – exemplified by some Israeli commentators and politicians arguing that IDF actions are justified by Hamas’s inhumanity.  If anybody doubts the nature of Israel’s enemy in Gaza, a read of the Hamas Covenant is in order.  Wieseltier is encouraged, on the other hand, by the willingness of Israel to examine its moral condition, much as the U.S. did after Vietnam and Abu Ghraib. 

Global powers – both rising and declining — face this test.  President Obama, in spite of his harsh criticism of Bush’s use of military force, will employ much the same tactics.  Daniel Byman, of Georgetown University, in a March 18th Foreign Affairs piece, referring to a U.S. Predator strike against militants in Pakistan in early March, wrote, “The strike, the fifth drone attack in Pakistan since late January, demonstrates that the Obama administration is not jettisoning the policies of the Bush administration regarding targeted killings; in fact, it appears to be ramping them up.” 

Byman, an expert on Israel’s use of targeted killings in the intifada, argues that targeted killings work because they disrupt enemy leadership, but cannot alone defeat an enemy. He notes as well that there is a heavy cost — 40% of the deaths from Israel’s targeted killings from 2000-08 were unintended, usually civilian and sometimes children.  A tough choice for any power to make.

Charm Offensive

April 1, 2009

 

 Source: The New York Times

Source: The New York Times

President Obama has a packed schedule of summit meetings.  Today he met with President Medvedev of Russia, reported on in the New York Times, and employed his considerable charm to try to move the Russians toward accepting the quid pro quo of the U.S. giving up missile defense in Eastern Europe in return for help from Russia in preventing an Iranian acquisition of a nuclear weapon.  Where Bush used bluster, Obama uses charm.  Thank God for our system’s alternation in power so we can try out new diplomatic strategies.  One risk with President Obama’s quid pro quo strategy with the Russians is that, in return for giving up missile defense, we may get vague promises on Iran, which we in fact already have.

IMF: Christmas comes in April

April 1, 2009
Source: CNN

G-20 leaders are debating not whether to give more money to the IMF, but how much.  The Brazilian Finance Minister is on record asking for US$750 billion more; the U.S. is reportedly in the same ballpark; Japan has already agreed to ante up US$100 billion; others are talking about a smaller overall Christmas gift of only US$250-500 billion.  Stephanie Flanders, the BBC economics editor, discusses this and other agenda items for tomorrow’s G-20 summit. 

The G-20’s main order of business tomorrow will be solving the global financial crisis, and in addition to capitalizing the IMF, the size of countries’ fiscal stimulus commitments and the makeup of financial regulatory reform are on the agenda.  A BBC article outlines the dynamics of the summit, providing a rough agenda of the day tomorrow and noting the protests surrounding this critical meeting.  More detail on protests is reported in this CNN piece.

A Concert of Great Powers

April 1, 2009
President Obama announces his Af-Pak Initiative.  Source: CNN
President Obama announces his Af-Pak Initiative. Source: CNN
Metternich   Source:  Wikipedia
Portrait of Prince Metternich Source: Wikipedia

Keeping nuclear-armed Pakistan out of the hands of radicals should be a central goal of U.S. foreign policy.  Like a nuclear-armed Iran, control of the Pakistani government by believers in a radical ideology would be one of the worst scenarios for U.S. interests and for the safety of the world.  Weapons of mass destruction will proliferate, but ensuring that basically conservative governments (like China’s and Russia’s), regardless of ideology, remain the custodians of these weapons should be on overriding international priority.  In terms of furthering this objective, President Obama’s “Af-Pak” initiative last week, and its focus on preventing Al Qaeda and the Taliban from taking control of Pakistan, should be applauded.

However, what is missing from this initiative is greater emphasis on multilateralism.  The world is fast slipping from America’s “unipolar moment” after the fall of Communism to a dynamic multipolar world of rising and declining powers.  The sooner the U.S. recognizes this and couches almost every foreign policy initiative in terms of getting the great powers to work together to solve global problems, the more likely this power shift will occur peacefully.  The only goal perhaps more important to U.S. interests than preventing WMD proliferation is this peaceful shift to multipolarity.  Such a shift, characterized by consultation and coordination, would provide the best mechanism for solving the world’s problems, including WMD proliferation.  True, you cannot put the brakes on America’s myriad foreign policy initiatives as new institutions of multipolarity are erected, but you can tailor policy with multipolarity in mind and use the bully pulpit to promote reform of the machinery of diplomacy.

In fairness, President Obama’s Af-Pak initiative did include a call for a Contact Group, including NATO, the Central Asian states, Gulf nations, Iran, Russia, India and China.  Yet this was more of an afterthought to a unilateral initiative.  Notwithstanding Movement Obama’s ever-present language of renewal – from the “new politics” and “transformational leadership” of the campaign to recent calls for a “new day” for Afghanistan and Pakistan and a “new partnership” with (as well as a “language of respect” and a “hand of friendship” toward) the Muslim world – Obama’s foreign policy remains much the same as that of his predecessor, the guy he so single-mindedly excoriated. 

The Obama team argues that they will be smarter and more focused than their predecessors, and perhaps the Af-Pak initiative will bear this out.  However, the new thinking required in foreign policy is not yet apparent in this administration (granted, it is still early).  We have thus far been treated to clever rhetoric, including cute, new metaphors, such as the “reset” button on U.S.-Russian relations.  Besides being another backhanded criticism of Bush, the “reset” metaphor fails to acknowledge that the “software” of U.S.-Russian relations remains the same.  Since the end of the Cold War, the West (led by NATO and the EU) has been unable to resist the temptation to extend its influence to Russia’s doorstep.  If Obama’s “reset” constitutes cooperation, not confrontation, discussion, not unilateralism, then he would in fact be installing new software in relations with Russia.  

Still, we need a point of departure in American foreign policy.  Some adjustment of global institutions is under way, including altering voting rights at the IMF, utilizing the G-20 forum instead of the G-7, discussing reform of the U.N. Security Council.  The president should raise the profile of this process, calling for new diplomatic machinery.  He should seek a Concert of Great Powers, similar to the Concert of Europe erected in 1815 by the victorious powers in the Napoleonic Wars.  

The Concert of Europe that included Great Britain, Russia, Prussia and Austria, and after a few years, France, the vanquished aggressor, prevented major wars for forty years and a global conflagration for nearly a hundred.  The Concert involved periodic international congresses and a recognition of the national interests of the great powers and the need for a balance of power.  The vice grip that Wilsonians have had on U.S. foreign policy thinking over the last century has precluded such an approach.  Likewise, neo-conservative unilateralism cast aside any close cooperation with other great powers.  It is time that realists put these ideologies in their proper place.  FDR had proposed something like a Concert of Great Powers after WWII, with his “Four Policemen,”  the U.S., U.K., USSR and China.

Kissinger has pointed out that balance of power politics without at least some international agreement on values cannot produce stability.   Yet agreement on shared values is difficult to achieve.  To an extent, the Concert of Europe included this component.  The powers agreed that territorial adjustment would only occur through consultation.  The three members of the Holy Alliance – Prussia, Russia and Austria – agreed on the principle of monarchical legitimacy, while France and Britain demurred.  Nevertheless, the governments of the day found enough shared values to make the Concert work for decades. 

There is much that the great powers today – both rising and declining – can agree on.  They all participate with vigor in the global economy.  They are all active members of international organizations and parleys, such as the U.N. and various regional fora.  They are all relatively conservative in that they do not seek substantial territorial aggrandizement and are essentially peace-loving.  None seeks the elimination of any other sovereign state.  Yet there are substantial exceptions and areas of disagreement.  China opposes self-determination for Taiwan; Russia would like a free hand in its near-abroad; America intervenes in local hotspots if certain principles are violated.     

A commitment to working through a Concert of Great Powers would present challenges and ethical quandaries for American policymakers, and would be difficult politically.  The U.S. Congress enjoys grandstanding on moral issues.  The president is required by law to produce public documents on international affairs that sometimes irritate other powers, such as the report on China’s military that was released last week, and the State Department’s Human Rights reports, released in late February.  These reports have a great deal of utility and can encourage ethical behavior in the world.  Nevertheless, cooperating closely with such rising powers as China, Russia, India, Brazil, Mexico, Turkey, Indonesia, Egypt and Saudi Arabia should become at least as high a priority as sermonizing to the rest of the world about ethics.  

This would mean, not giving up our values, but moderating the vehemence of our pursuit of them.  It would mean recognizing that cooperating with other great powers holds out the prospect of solving complex regional problems and maintaining global peace and prosperity, worthy moral objectives as well.  Pursuit of great power accord might be worth the short-term toleration of unfortunate ethical lapses of other powers.  It might require the U.S. to put religious freedom and democracy lower on the list of priorities than coordination with the great powers.  It might mean pushing allies to do things that might seem unfair, in order to solve a conflict that would garner broad international support.  In the end, resolution of local conflicts that attracts the support of the great powers would be eminently more stable than the alternatives.   

The world has a large number of international and regional fora, including the UN (both the General Assembly and the Security Council), NATO, the G-20, the Asia-Pacific Economic Cooperation forum, Organization of American States, Organization of the Islamic Conference, African Union, Arab League, the EU, the Shanghai Cooperation Organization, the IMF, World Bank and regional development banks, and the WTO, among others.  What do we do with all of them? 

These groupings and institutions should not necessarily be replaced by other machinery.  However, a regular forum for the great powers, both rising and declining, to meet and discuss issues, and perhaps in time, to confront aggressors and solve regional problems, is needed.  Whether this could take place through an existing vehicle, say, the G-20, or the U.N. Security Council (revamped to include new members), or even through regular bilateral discussions and ad-hoc parleys, such as the North Korea six-party talks, such diplomatic coordination would be critical to a peaceful transformation of the international system.  

This approach does not preclude the U.S. from giving voice to its values — promoting democracy, human rights, and private enterprise.  It simply suggests that the best way to pursue these ends in the long run is through a peaceful coordination of the interests of the great powers.  Again, sometimes the emotionally-satisfying sermonizing we Americans enjoy can be counterproductive to the very aims we seek.  Though more intensive diplomatically, especially in the near term, this approach over the long term could lift the burden of global stability off the solitary shoulders of the United States.  

It is unclear what the initial steps this administration should take to usher in a multipolar world.  President Obama is traveling to Britain this week for the G-20 summit, not a bad time to launch such a discussion.  Updating the existing machinery, already under way, is not a bad beginning.  Let’s hope that Movement Obama remains true to its rhetoric and seeks renewal in American foreign policy.