Archive for the ‘NATO’ Category

Choose: MoveOn.org or Patraeus

June 24, 2010
President Obama and General Petraeus.  Source: www.tolerance.ca/image/photo 
President Obama and General Petraeus. Source: http://www.tolerance.ca/image/photo

Mr. President, you can’t have it both ways.  You can’t have General Petraeus come in and save your Afghan policy at the same time as you have been associated with MoveOn.org, which called him “General Betray Us” on the pages of the New York Times in 2007.

I don’t want to be the guy always criticizing President Obama – I think in many ways he is doing a good job.  But I cannot help but shine light on hypocrisy in politics, on whichever side of the aisle it occurs.  With Obama, who cultivates an image of new politics and bipartisanship, I feel compelled to draw readers’ attention to misperceptions of the man.

The facts:

– In 2003 MoveOn.org, funded in part by anti-Bush billionaire George Soros, allowed an ad on its website that compared Bush to Hitler, later claiming they had nothing to do with it.

– In 2007, MoveOn.org posted an ad in the New York Times, calling General Petraeus “General Betray Us,” and accusing him of cooking the numbers in order to make President Bush’s surge in Iraq look effective.  Senator (and Candidate) Obama relentlessly criticized the surge in Iraq and its architect, General Petraeus, only later admitting it might have worked and employing a similar strategy as president in Afghanistan.  Candidate Obama in 2007 failed to heed calls to criticize the “General Betray Us” ad.

– On February 1, 2008, MoveOn.org endorses Barack Obama for President of the United States, and Obama accepts.

– On June 23, 2010, President Obama calls in General Petraeus to head up the NATO mission in Afghanistan, which involves a surge of troops and counterinsurgency operations, much like what successfully ended the Iraq civil war under Obama’s predecessor.

Can Obama supporters at least admit the hypocrisy please, even if it is true that most politicians do the same?  I know many say, the election is over, forget about what happened in the heat of the campaign.  I say, let’s be fair and hold all politicians accountable for what they do and say on the campaign trail, especially when it affects policy.

Will General Petraeus run for high office one day?  Interesting question…

Medvedev: Glasnost and Perestroika all over again?

November 13, 2009

Russian President Medvedev and his mentor, Vladimir Putin.  Note: this is not a photo from Medvedev's speech this week.  Source: www.russiablog.org

Not so fast.  President Medvedev has resounded the main themes of reform for some time now, without his government (or, rather, Putin’s) following through.  See a NYTimes article from yesterday on President Medvedev’s annual address to the Russian nation, as well as a report on the matter below in a CSFB Emerging Markets report.

Reducing Russia’s humiliating dependence on energy exports and the role of state enterprises in the economy, and adding flexibility to labor markets and greater pluralism to Russia’s proto-democracy were all laudable goals mentioned in his speech, delivered at the Kremlin with Putin in attendance.  Mere platitudes devoid of concrete measures, critics say.  Maybe so, but the first step toward change is talking about it openly. 

Russia may have a positive future and a greater potential to join Fukuyama’s end of history in terms of being a functioning liberal democracy and market economy than other authoritarian countries, such as China, Saudi Arabia, Iran, to mention a few, where the lack of nascent democratic institutions distinguishes them (though Iran has a few).  Russia looks a bit like the Iberian, Greek and Latin American authoritarian regimes just before their transitions to democracy in the 1970s-80s; these societies yearned for the freedoms and prosperity of the West.  One day, Russia will join Europe and the West, if Europe and the West will have them.  Institutions such as the EU and NATO remain closed to Russia.  Remember what Kissinger said about NATO expansion — alliances have to be against somebody.  That way of thinking has to change in the West, and then maybe Russia will accelerate Medvedev’s reforms.    

From CSFB today:

Sergei Voloboev
+44 20 7888 3694
sergei.voloboev@credit-suisse.com
President Medvedev’s annual state of the union address yesterday contained criticism of past economic policies and some specific economic and political reform proposals. With a reference to his “Russia, Forward!” article published on 10 September, Medvedev has called for the country’s comprehensive modernization, based on democratic principles. Referring to the reasons for Russia’s particularly painful economic contraction during the recent economic crisis, the president mentioned the economy’s primitive structure, “humiliating dependency” on raw materials and general reliance on export receipts, appallingly low competitiveness of Russia’s manufacturers, as well as insufficient efforts to adopt a new growth model. Medvedev stated that even though the situation in the banking system has stabilized, it remains weak and insufficiently capitalized.
Medvedev mentioned the following specific directions for economic reform:
– further reform of the financial sector, which needs to be brought in line with the modernization requirements;
– a long-term reduction in the size of the state sector (from about 40% at present);
– transformation of state corporations operating in competitive environments into joint stock companies and liquidation or sale of all other such corporations by 2012; and,
– introduction of tax benefits for innovation-related activities and of a transition period to higher levels of mandatory insurance contributions.
– The president has offered a detailed view of the needed technological modernization, including the following:
– urgent commencement of technological modernization of the entire manufacturing base;
– creation of a modern technological centre – a Russian Silicon Valley;
– introduction of energy-saving equipment, bulbs, meters for use by utility services;
– wider application of space technology in the telecommunication industry;
– introduction of supercomputers;
– universal access to broadband Internet;
– development of strategic information technologies; and,
– a three- to four-month limit on granting approvals for new investment projects.
Encouragingly, the address contained specific proposals aimed at easing access to Russia’s labour market for qualified foreign workers, including a simplified visa regime and issuance of long-term visas, adoption of a more uniform approach to recognising foreign higher education diplomas and other educational degrees. Medvedev also mentioned certain measures in the area of political modernization, including a gradual phasing out of constraints on activities of small political parties and allowing such groups to occasionally participate in parliamentary meetings.
Overall, Medvedev’s policy address was fairly robust in criticising Russia’s recent economic policies, but it was predictably short on specific details on how to implement and observe the proclaimed reform objectives. It should nevertheless encourage the liberal-oriented part of Russian public that became very concerned about Russia’s democratic principles in the aftermath of the flawed municipal elections in early October. Representatives of the business/ investor community have likely noted the commitment to streamline the tax system further but were probably disappointed about the lack of more specific details.
October fiscal data points to rebalancing of revenue sources. This morning’s regular set of monthly fiscal data (for October) contained few surprises. There was another large monthly deficit (RUB179bn, 4.9% of monthly GDP, after 4.6% of GDP in September), taking the 12-month deficit to 6.5% of GDP from 5.5% in September. The monthly revenue/GDP ratio edged up to 18.4% of GDP from 18.3% in September on the annual basis; revenues fell to 17.5% of GDP from 18.0% in the previous month. Total expenditure was 23.3% of GDP, up from 23.0% in September and rose to 24.0% of GDP on the 12-month rolling basis from 23.4% in September.
An interesting observation on the composition of revenues in October: the data shows a weaker energy component of revenue (8.1% of monthly GDP, vs. 9.6% in September), while non-energy revenues (which have been declining progressively since June) jumped to 10.4% of monthly GDP from 8.7% in September. Overall, the data continue to point to a very large deficit for the full-year 2009, but its magnitude now looks likely to be materially lower than the government had anticipated (close to 7% of GDP rather than 8.3% assumed during the drafting of the 2010 budget).
The first official estimate for Q3 2009 GDP was better than the government’s provisional estimate. Rosstat reported yesterday that Q3 2009 GDP fell 8.9% yoy (after Q2 GDP was down 10.9%). This was better than the Economy Ministry’s previous 9.4% estimate for Q3. The statistics office has not provided a seasonally adjusted QoQ growth estimate, saying only that growth was 13.9% qoq in volume terms. Any seasonal adjustment would not be very reliable this year because of a structural break in series, but it is now clear that the original government estimate of 0.6% qoq SA growth in Q3 will be surpassed significantly (not adjusting for working day differences, we would estimate that qoq SA growth in Q3 was close to 3% – a very strong result, just slightly weaker than the 3.5% qoq growth in early 1999, after the economy bounced back from the H2 1998 meltdown).

Photo above:  Russian President Medvedev and his mentor, Vladimir Putin.  Note: this is not a photo from Medvedev’s speech this week.  Source: www.russiablog.org

Emerging Europe has fiscal problems, says Fitch

October 29, 2009
Emerging Europe: Fiscal woes  Source: www.d-orland.com
Emerging Europe: Fiscal woes Source: http://www.d-orland.com

Fitch Ratings published a report this week analyzing the fiscal deterioration taking place in 21 countries in what it calls “Emerging Europe,” which includes three sizable economies — “rising” power Russia’s nearly $1.7 trillion economy, struggling Turkey’s $745 billion economy, and Poland’s nothing-to-sneeze-at $525 billion economy. Like much of the rest of the world, Emerging Europe juiced its economies with fiscal stimulus packages due to the Great Recession, and therefore, needs an exit strategy over the medium term to this fiscal deterioration. 

Fitch rates Russian sovereign debt at BBB with a Negative Outlook (likely to be downgraded within two years); Turkey’s BB- with a Rating Watch Positive (likely to be upgraded, albeit from a low level, within the next three months); and, Poland’s debt A- with a Stable Outlook.

Fitch expects Polish GDP growth to languish before rebounding to about 3% in 2011; Russian growth to creep back above 3%; and, Turkey’s to move back to around 4% per year.  Government deficits in all three will remain sizable at between 3-6% of GDP per year, though quite small next to America’s 10% this year.  Poland’s government debt will rise to nearly 60% of GDP by 2011; Russia’s government debt remains very, very small (at below 15% of GDP); and Turkey’s will rise to nearly 50% of GDP before plateauing.  These levels are still modest relative again to U.S. levels approaching 90% in the coming years.  Poland’s and Turkey’s current account balances (a measure of trade) are in deficit, though forecast by Fitch to be below U.S. levels, which should exceed 3% of GDP in the coming years.  Russia, of course, as an energy exporting powerhouse, remains in surplus on its current account.

Central European economies, including Poland’s, are expected to move out of recession nicely, driven by links to the euro area, especially to the reviving German economy.  Baltic and Balkan states are rebounding less nimbly, according to the Fitch report.

A number of countries have been assisted by sizable IMF financing, including Turkey, Hungary, Armenia, Georgia, Latvia, Romania, Serbia and the Ukraine, not to mention that Poland obtained a $20.5 billion Flexible Credit Line with the IMF.    

Have a look at the Fitch Press release on the report below. 

Fitch: Public Finance Concerns Move to the Fore in Emerging Europe
29 Oct 2009 4:00 AM (EDT)


Fitch Ratings-London-29 October 2009: Fitch Ratings says in a new report that although external financing risks have eased somewhat for many countries in emerging Europe (EE) during recent months, rising government deficits and debt ratios mean that sovereign rating dynamics remain negative.

“Worst fears of a systemic economic and financial meltdown in emerging Europe have receded as global output has started to recover and financial conditions have eased, driven by the massive global fiscal and monetary policy stimulus, rescue packages led by international financial institutions and, in many countries, impressive economic resilience,” says Edward Parker, Head of Emerging Europe Sovereigns at Fitch.

“However, major challenges remain due to the scale of the negative shocks to hit the region; the costly legacy of the crisis, notably rising public debt ratios; and the uncertain “exit” from the crisis, recession and accommodative policy settings; while a relapse in one of the more vulnerable countries could trigger ripples across the region,” says Mr Parker.

Concerns over public finances have moved to centre stage. Fitch forecasts the impact of the recession – in some cases augmented by fiscal stimulus measures, lower oil prices and bank bail-outs – to widen the average budget deficit to 5.9% of GDP in 2009 from 1.1% in 2008, before narrowing to 4.6% in 2010. It expects the average government debt/GDP ratio to rise to 36% at end-2010 from 23% at end-2007. Failure to implement credible medium-term fiscal consolidation could lead to rating downgrades. In many countries, social pressures and elections will make it harder to implement austerity measures. This is fertile territory for political shocks. For countries reliant on IMF-led programmes for fiscal and external financing and for underpinning economic confidence, failure to stick to programme conditions poses additional risks to macroeconomic stability.

Fitch has revised its forecast for 2009 EE GDP to -6.1% from -4.6% in its June forecast round, owing to an even steeper drop than anticipated in output in H109. This contrasts with just -0.1% forecast for emerging markets as a whole. It forecasts only Azerbaijan and Poland will avoid recession, while Armenia, Estonia, Latvia, Lithuania and Ukraine will suffer double-digit declines in GDP. However, it has revised up its 2010 growth forecast to 2.6% (from 1.5%), owing to the unwinding of the deeper 2009 contraction and more supportive global conditions. Indeed, it estimates EE GDP rose by about 1% q-o-q in Q209, after plummeting 7% in Q109, led by a rebound in Turkey. But weak investment, rising unemployment, moderate capital inflows and credit growth, fiscal consolidation and a rebuilding of balance sheets point to a subdued recovery.

External financing and currency risks, which were the primary vulnerability of many countries in EE in the initial phase of the crisis, have eased somewhat, though remain material. This reflects a rapid reduction in current account deficits (CADs), substantial multilateral assistance, a boom in sovereign external issuance (USD19bn year to date) and relatively resilient private-sector roll-over rates. Fitch estimates the region’s gross external financing requirement (CAD plus medium- and long-term (MLT) amortisation) at USD304bn in 2009 and 2010, down from USD363bn in 2008.

In contrast to the rally in EE government bond prices, sovereign ratings dynamics remain negative, albeit at an easing pace. Following 11 notches of downgrades of foreign-currency Issuer Default Ratings in Q408, there were two downgrades in Q109, three in Q209 and only one in Q309. The balance of Outlooks and Watches has improved slightly since August 2009, but 12 countries are on Negative and only one on Positive. Fitch expects future rating actions to be driven more by country-specific developments than general trends.

The full report, entitled “Emerging Europe Sovereign Review: 2009”, is available on the agency’s website at http://www.fitchratings.com

Contacts: Edward Parker, London, Tel: +44 (0) 20 7417 6340, David Heslam, +44 (0)20 7417 4384; Eral Yilmaz, +44 (0)20 7682 7554.

Barack Obama: Naif or Visionary?

July 7, 2009

President Obama in Prague earlier this year calling for nuclear disarmament.  Source:  www.guardian.co.uk

Slip back for a moment to the early 1980s.  The Reagan administration was talking about a winnable nuclear war.  Reagan himself called the MX missile the “Peacekeeper Missile,” a powerful multiple warhead nuclear weapon some interpreted as an effort to obtain a “first-strike capability.”  Orson Welles, that powerful cinematic presence, ambled up to the podium, with the assistance of a cane, on a sunny day in Central Park in June 1982, to address thousands in the Nuclear Freeze movement.  Activists opposing Reagan’s foreign policy, including this blogger, marched from the Lincoln Memorial to the Pentagon in 1981, chanting “No draft, no war, U.S. out of El Salvador!!”  When mounted police trotted alongside the marchers, some began chanting, “Free the horses!”  It was the 1980s, but we wished it was the sixties.

Obama has said he came of age during the Reagan presidency.  So did I.  For many years, I wore a T-shirt I purchased at the Nuclear Freeze rally that had a picture of our blue planet on it, with words above, “Don’t Blow It!”

Barack Obama, spending his last two college years at Columbia University, wrote an article in 1983 profiling two anti-war groups on campus, which is attached and currently making its way around the web.  In addition, he wrote a paper for a poli sci class, for which he received an ‘A’, on how he would negotiate nuclear weapons reduction with the Russians.   This week he will have a chance to implement that paper.  Dreams come true for some of us.

A NYTimes article today explains how Obama’s thinking on nuclear weapons has evolved over the years since that article and poli sci paper.  It suggests that at core he, like Reagan ironically, wants to eliminate nuclear weapons from the planet.  (Read his Prague speech on the matter.)  Yet today, he’ll settle for negotiations with the Russians for nuclear weapons reductions and for efforts at non-proliferation. 

He is a remarkable fellow, our president, with so much confidence and affability that he convinces people to do things.  This is a presidential quality.  A quality W woefully lacked.  I am impressed by the fact that the Russians, in advance of Obama’s trip, have agreed to allow U.S. military overflights to resupply NATO in Afghanistan.  Gobama!!

I just hope that over the years since the early eighties, Obama has come to grasp the complexities and ironies of interstate relations and the way nuclear weapons factor in to whether states make war or peace.  A study of these issues can be emotionally-unsatisfying, especially to a utopian wishing to put an end to the “twisted logic” of national security, bemoaning the “academic discussion of first versus second strike capabalities,” and attempting to confront “the relentless, often silent spread of militarism in this country.”  It’s okay, Mr. President, we all wrote like that in college.  

For the record, militarism is what happened in pre-World War I Germany, as the German General Staff, backed by the Kaiser, virtually hijacked that country; it is not at all what has taken place in America since George Washington turned down the opportunity to become a military dictator. 

The question is, now that Barack Obama is the leader of what he called in 1983 the “military-industrial interests, as they add to their billion dollar erector sets,” can he make the best decisions on weapons systems and force posture that will make the world safer?   

Although nuclear weapons are a horrible reality, they have arguably reduced great power conflict since the end of World War II.  While we hate having this threat hanging over us, it is one of the ironies of being human that it is exactly this threat of mutual destruction that has deterred nuclear-armed states from going to war.   So, President Obama’s goals of reducing nuclear weapons and staunching proliferation make sense, but we must be very careful when talking about nuclear disarmament.  The reality is that if all the peace-loving major powers disarmed, the technology remains out there, the genie is out of the bottle.  Some nasty power some time in the future (need I name names?) could and would build such weapons.  Would we have a deterrent to their use or threatened use of such weapons at that time? Could we develop one quickly? We must tread carefully in this area.  The disarmament and arms control efforts of the liberal democracies in the thirties occurred against the backdrop of Germany’s secret arms buildup, leaving them unable to confront Hitler in 1939.

Furthermore, those of us who opposed the Reagan arms buildup must admit that what Reagan (and George Kennan and Paul Nitze) had hoped would happen happened!  We bankrupted the Soviet Union through an arms race, and that nasty dictatorship withered away.  Was it worth the risk?  Maybe not.  The risk of nuclear war probably increased during the eighties because of the subtle shift in the balance of first strike/second strike capabilities, what Student Obama scorned in 1983.  If rasher men had been running the Soviet Union at the time, they could have interpreted Reagan’s commitment to the MX missile and other weapons systems, in conjunction with statements by such luminaries as Cap Weinberger, as an effort to obtain a first strike advantage, an ability to wipe out your adversary in a first strike so as to sustain only a modest second strike against yourself.

Back to today, the disagreement that Obama has had with his Secretary of Defense, Bob Gates, over whether to modernize our nuclear arsenal, warrants careful consideration.  As the guy calling for nuclear arms reduction and wishing to build alliances through the power of America’s example, Obama does not want to build new “erector sets,” especially when he’s announcing expensive domestic spending initiatives.  Yet it is important for the U.S. to stay at the technological edge in military preparedness, especially as regards weapons that improve defense and deterrence.  I’m not saying that Gates’s initiative is the right one, only that policy makers must choose which technologies will be critical to America’s security and a safer world.  Yet Obama’s priority seems to be, simply, to not build any more nukes.  

The NYTimes article speaks about a class on presidential decision-making at Columbia that was formative for Student Obama, in which he wrote a paper on how to conduct nuclear arms negotiations with the Russians.  I took a course around the same time at Tufts University that was formative for me, called War and War Prevention, taught by Stephen W. Van Evera, now a professor at MIT and author of an important book, Causes of War:  Power and the Roots of Conflict, that I hope Obama and his national security team have studied.  The book’s conclusion: policies that strengthen a nation’s capacity to defend itself, rather than conquer other nations, make the world safer by convincing leaders the world over that conquest is difficult.  So, disarmament doesn’t usher in a safer world, arming with the right armaments, defensive armaments, does.  The book also suggests that misperceptions about this “offense-defense” balance have been a leading cause of wars throughout history, notably the catastrophic World War I.  Therefore, transparency, policy clarity and the disinterested analysis of national security by people outside government would reduce the risks of misperception. 

Ironically, nuclear weapons have bolstered the defense, by discouraging would-be attackers.  It is a depressing thought that the most horrible weapon in history has had a silver-lining, just as the most hopeful prospect – disarmament – has helped cause war.   For a greater understanding of why human affairs involve so much contradiction, we must, alas, turn to Mr. Freud, who last century theorized that two instincts drive human beings – the love and death instincts.  The love instinct (libido) drives us to build and the death instinct to destroy.  President Obama is definitely a builder.  He should just relegate his utopian visions to their proper place on the back burner, so that he can take a hard look at defense policy, formulating one that will promote American security and peace in the world.  The Van Evera book is a starter…

Are Status-quo Powers’ AAA ratings vulnerable?

June 11, 2009

Standard & Poor's Logo    Source: Bloomberg

S&P thinks so.  Moody’s and Fitch do not.

Actually, it is more nuanced than that.  A number of what we might call Status-quo or even declining, though still formidable, great powers — including the U.S., U.K., Germany and France – have sustained dramatic negative consequences from the global recession, including rapidly rising government debt levels.  It is a time of testing our assumptions about what makes a great power, what makes a strong economy, and what makes a wealthy society.  And, however painful, we must revise our assessments of relative power and sovereign creditworthiness as needed.   

No doubt such rising powers as China, India and Brazil are poorer – especially in terms of per capita income, but among advanced countries, the economic growth outlook over the medium term looks dismal, as government seeps into more corners of the economy, controlling banking systems and industrial companies, which if not reversed, could eventually stifle private initiative.  In addition, if gaping government deficits are reversed over the medium term via higher taxes, rather than through spending cuts, the government’s stranglehold on the economy will persist.  No matter what, things should get a lot worse before they get better.  Whether or not they get better is in the hands of policy makers.

The U.S. and its allies in Europe are undergoing exactly what Paul Kennedy warned against over twenty years ago in his book, The Rise and Fall of the Great Powers.  Sovereign financial solvency is the foundation on which military and political power can be projected, and this foundation crumbles when governments ignore deteriorating finances.  Governments today must act quickly to cut deficits, once signs of a durable recovery are clear.

The rating agencies remain relatively sanguine.  With the exception of S&P, they don’t expect the major countries to lose their coveted AAA status, as Japan did over a decade ago.  Moody’s even points out that if all AAA’s deteriorate together, they can all remain AAA because ratings are comparative.  However, what is required right now is to compare these AAA’s to lower-rated credits, for example, to such emerging markets as China and Singapore, Hong Kong, Korea and Saudi Arabia.  In spite of what a revision of the relative assessment of, say, the U.K. versus Kuwait might say for how wrong sovereign analysts were in the past, this reassessment must be done.

As for the U.S. and the U.K., the two economies experiencing the textbook example of the current crisis — with declining real estate values, indebted consumers, and failing banks — Fitch Ratings says they:

“possess strong capacity for adjustment, thanks partly to supply-side flexibility, a track record of fiscal consolidation, as well as exceptionally strong balance sheet and financing flexibility.”

 and,

 “Benchmark borrower and reserve currency status are two key features of this financing flexibility.”

 About the U.K. and the U.S., Moody’s says, they:

 “are being tested because of a shock to their growth model and large contingent liabilities. However, in our opinion, these countries display an adequate reaction capacity to rise to the challenge.”

Yet S&P a couple of weeks ago revised the Outlook on the U.K.’s AAA rating to Negative, saying that:  

“in light of the challenges to strengthen the tax base and contain public expenditures, the U.K. government debt burden could approach 100% of GDP by 2013 and remain near that level thereafter. The rating could be lowered if we conclude that, following the forthcoming general election, the next government’s fiscal consolidation plans are unlikely to put the U.K. debt burden on a secure downward trajectory over the medium term.”

S&P, in its report of June 4, forecasts the U.K.’s government debt burden to rise above most other AAA’s, including the U.S., by 2011.  Although the U.K.’s exposure to the current crisis is similar to America’s, its boom in credit to the private sector surpassed that which occurred in the US, with domestic credit to the private sector (and public corporations) representing approximately 200% of GDP in the U.K. versus approximately 150% in the U.S. and a AAA median closer to 130%.   The run-up in U.K. government debt is expected to be even more dramatic than in the U.S.   

Likewise, the U.K.’s GDP growth outlook looks worse in the coming years than its AAA peers’.

Paul Kennedy warned us that “The relative strengths of the leading nations in world affairs never remain constant, principally because of the uneven rate of growth among different societies and of the technological and organizational breakthroughs which bring a greater advantage to one society than to another.”  And, that history shows, “a very significant correlation over the longer term between productive and revenue-raising capacities on the one hand and military strength on the other.”

Kennedy argued that:  1) competition and commercial advances in western Europe in the centuries up to the 16th allowed this region to eclipse other power centers – Ming China, the Ottoman Empire, Mogul India, Muscovy, and Tokugawa Japan – which suffered from excessive centralization of authority; 2) the Habsburgs over-extended themselves militarily relative to their weakening economic base in the 150 years up to the mid 17th century; 3) Great Britain emerged as an economic superpower and a military power that could balance rivalries in Europe, by virtue of innovation in banking, shipping and manufacturing; 4) rapid shifts in economic power up through the turn of the 20th century made for unstable relationships among the rising and status-quo powers; and 5) the the U.S. economy has been in relative decline since the middle of the 20th century with the emergence of the rising powers. 

 The more rapid the shifts in relative power, the more unstable the international system can be – risking war – as the distribution of authority and responsibility rushes to catch up with power realities.  The relative decline of such powers as the U.S. and Europe over the long term cannot be avoided, as poorer nations such as China gain technological know-how to rapidly increase per capita income.  However, the speed and size of the relative decline and its management (i.e. through diplomacy) will determine how shocking this change will be (i.e. through war or through peace). 

Which is all to say that AAA sovereigns, such as the U.K. and U.S., would be well-advised to seek substantive fiscal consolidation (read: cut deficits, especially through spending cuts), once there is confidence the worst of the financial crisis is over.

See:  Standard & Poor’s report on the United Kingdom of June 4, 2009, Moody’s report “How Far Can Aaa Governments Stretch Their Balance Sheets” of February 2009, and Fitch’s report “High-Grade Sovereigns and the Global Financial Crisis” of March 17, 2009.

Rising Powers Update…

May 18, 2009

China and the U.S. inextricably linked.  Source:  NYTimes Magazine

A lot is going on in the Rising Powers at the moment, so why not begin the week with a survey of key developments and important news articles? 

On China, there was an excellent article by David Leonhardt in the New York Times Magazine, explaining quite clearly the symbiotic linkages between the economies of China and America and the challenging tasks both governments face to correct the imbalances in trade and finance that have underpinned the current global financial crisis.  I applaud Leonhardt’s mentioning Ben Bernanke’s past and present near-blaming of America’s debt-driven trade deficits on China’s savings glut.  I first heard Bernanke make this argument at a Merrill Lynch dinner in 2005 where he was keynote speaker and was angling to be Bush’s nominee for Fed chairman.  According to Bernanke, then Chairman of the Council of Economic Advisers, America’s twin deficits were not the problem; abysmally low American household savings were not the problem.  It was the global savings glut that kept interest rates low in the U.S.  Global capital sought the superior returns of U.S. assets.  It was up to other countries like China to adjust, not the U.S.  The Special of the Day at the Federal Reserve dining room these days is crow.

I disagree with one point made in the Leonhardt article.  He quotes China expert Nicholas Lardy saying that China’s massive current account surpluses were accidental; the Chinese “fell into it.”  As head of Asian Sovereign Ratings at a global rating agency during the Asian financial crisis of the late 1990s, I recall Chinese officials observing the financial dominos falling all over Asia at that time.  They saw governments, from Korea to Thailand, failing to follow a policy of targeting higher foreign exchange reserves.  As a result, I believe the Chinese became determined to run up their surpluses and to bank them, so as never to go hat in hand to the IMF like their neighbors had to do.

Also on China, a Foreign Affairs article called “The G-2 Mirage,” penned by Elizabeth Economy and Adam Segal, argues that prospects for the G-2 cooperatively managing world affairs are not great, given conflicting values and goals, even less so now that Obama is in power.  I heard Economy argue this point in a political salon I attended.  In contrast to Bush, Obama’s team will stress with China reducing greenhouse gases and improving human rights, which could get in the way of coordinating economic policies and solving problems around the world, notwithstanding the best intentions of Tim Geithner.

On an optimistic note regarding China, in a world where relations between (and within) states have been deteriorating (whether it is in Pakistan and Afghanistan, between Russia and NATO, or between Iran and its neighbors), it is encouraging to see China and Taiwan improving relations.  An Economist article discusses the announcement in late April by China Mobile that it would buy a Taiwanese mobile operator.  Taiwanese capitalists have long invested in the Mainland, but Taiwan has restricted Mainland investment in its economy.  With its economy now faltering, Taiwan has liberalized its investment rules vis-a-vis the Mainland.  This is part of a mutual thawing of relations since Taiwanese President Ma Ying-jeou of the KMT party, which advocates closer cross-straits relations, replaced the controversial President Chen Shui-bian, of the pro-independence DPP party, last year. Yet the Taipei Times reports that Sunday tens of thousands of protesters took to the streets of two Taiwanese cities to show anger at President Ma’s pro-Beijing policies.  Organizers had hoped for hundreds of thousands.

In India, contrary to what most pundits had expected, the incumbent Congress Party did very well in national elections and will easily form the next government.  It seems Indians voted for who they believe will run the economy and look after the poor best, not who will take the hardest line on terrorism (the BJP).  Likewise India’s smaller and regional parties had a poor showing overall.  I argued in an earlier post that an election resulting in political fragmentation, characterized by a surge of support for the smaller parties, could lead to higher government deficits and debt.  Let us see if a government dominated by the Congress Party can fulfill its election promises without a deterioration in sovereign creditworthiness.  What is clear is that President Singh is now a giant on the Indian political scene, much like Barack Obama; and, with a likely 260 seats, he needs just 12 more from other parties to govern.

Prime Minister Netanyahu of Israel will meet Monday with President Obama in Washington.  A must-read ahead of this meeting is a NYTimes op-ed by Jeffrey Goldberg, correspondent for The Atlantic, in which he explains what motivates Netanyahu and the consequent challenges Obama will face in dealing with him.  I had extensive meetings with Netanyahu over the years he was finance minister, and there is nothing in Goldberg’s piece that I would disagree with. While it would not be correct to say there has been a deterioration in relations between the U.S. and Israel since the election of Obama in November and Netanyahu in February, the expectation is that they will not see eye-to-eye in the same manner Bush and Olmert did.  However, an AP article quotes Defense Minister Barak suggesting that Netanyahu, who has lowered expectations about his appetite for negotiations with the Palestinians, will reaffirm his country’s commitment to a two-state solution.  This will be a sort of “gift” to Obama, but will there be a quid pro quo?  A commitment to heavier sanctions on Iran on the part of America?  How can Obama promise that?

In the presidential election in Iran, reformist candidates have been knocking Ahmadinejad for denying the Holocaust and ruining relations with the West.  If there is any hope that a reformist can win in Iran with Khamenei lurking behind the scenes, would this presage a détente with the West?  The trouble with this hope is that it may in fact be the case that both reformists and hardliners in Iran are intent on building a nuclear weapon.  Perhaps the only way to stop one, therefore, if that is what in fact the West wants to do, is to sharply curtail the country’s access to petroleum markets worldwide, which is a highly unlikely event.

And in Pakistan, the UN estimates one million people have fled their homes, due to fighting between the government and the Taliban.  Likewise U.S. targeted killings continue, with criticism, including in this country, mounting.  And, a New York Times article on Sunday quoted Admiral Mike Mullen, the chairman of the U.S. Joint Chiefs of Staff, confirming that the government of Pakistan is rapidly expanding its nuclear weapons arsenal.

In Brazil, hundreds of thousands remain homeless after floods ravaged the northeast, and the government is being criticized for not doing enough, reminiscent of criticism of the Bush administration after Hurricane Katrina.

And Friday, Russia and other nations could not agree on a proposal to extend peacekeeping monitors from the Organization for Security and Cooperation in Europe to stay in Georgia beyond June 30.

The world takes one step forward and two steps back…

Wilsonianism Run Amuck?

May 8, 2009
Georgia, bounded to the west by the Black Sea, to the north by Russia, to the south by Turkey and Armenia, and to the east by Azerbaijan.  Abkhazia is the highlighted part of Georgia to the northwest.  Source:  Wikipedia
Georgia, bounded to the west by the Black Sea, to the north by Russia, to the south by Turkey and Armenia, and to the east by Azerbaijan. Abkhazia is the highlighted part of Georgia to the northwest. Source: Wikipedia
Since President Wilson enunciated his Fourteen Points during World War I, the principle of national self-determination has been an objective of the Western Powers.  The plethora of weak national states in Eastern Europe in the interwar years, and the temptation this gave a revanchist Germany to invade and a greedy Soviet Russia to divide the spoils tempered to some extent postwar Western support of national self-determination.  It remains a principle the world community supports…however selectively.

An interesting NYTimes article discusses the national aspirations of less than 100,000 ethnic Abkhaz in Georgia, a nation of 4.7 million (mostly ethnic Georgians), which finds itself hosting NATO exercises and therefore in a tense relationship with neighboring Russia.  Russia recognizes the independence of Abkhazia and South Ossetia.  Most every other nation in the world does not. 

The conflicts there are complex, with poor judgment taking place on both sides.  Abkhaz nationalists are seeking to attract some 500,000 Abkhaz living in Turkey to return and help build an independent state.  Ottoman Turkey invaded Abkhazia in the 16th century and converted the local population to Islam (versus the Orthodox Christianity of ethnic Georgians).  Interestingly, it seems much of the Abkhaz diaspora had fled Georgia in the 19th century to escape the rule of an expanding Czarist Russia.  Russia is now of course the principal benefactor of Abkhaz separatists.

So, where does our moralistic support of national self-determination of peoples begin and end?  The Abkhaz and South Ossetians? The Chechens? The Basques of Spain and France? The Kosovar Albanians?  The Palestinians?  The Tibetans and Taiwanese?  The Kurds, the Armenians, the Azeris?  The Sunni of Iraq?  The residents of Darfur and of southern Sudan? Kashmiri Muslims under Indian rule? Tamils in Sri Lanka?  German speakers in the Italian Sud Tirol?   Difficult questions affecting minorities in some Rising Powers, as well as the world’s other powers who have to formulate policies balancing the principle of national self-determination against other interests.

Nato: Keep your eye on the ball

May 7, 2009

NATO in Georgia.  Source: AFP

Little kids want to live in a world where they get everything they want.  Parents teach kids that they can control only so much.  In AA meetings, recovering alcoholics quote the “Serenity Prayer,” attributed to theologian Reinhold Niebuhr:

God grant me the serenity

To accept the things I cannot change;

Courage to change the things I can;

And wisdom to know the difference.

Let us add to this – use your scarce resources to change the things that are important to change.  This would be a good prescription for the leaders of the North Atlantic Treaty Organization.

NATO should focus on what really matters to Western interests over the coming half-century:  arresting the proliferation of WMD; stopping Iran from acquiring the above; anchoring the Great and Rising Powers (including Russia and China) into Western institutions in order to more effectively resolve regional conflicts and other global problems; and, gently pushing human development in the direction of Fukuyama’s End of History. 

Ensconcing Georgia in NATO and other Western institutions is expressly not on this list of priorities (see NYTimes article).  Sure, it would be nice to have Georgia in NATO.  Likewise it would be nice to have Russia in NATO, Kissinger’s point that alliances must be against someone notwithstanding.  But, as adults we must realize that we cannot have it all.  America’s unipolar moment of the nineties gave us a false sense of our power.  Let us therefore refocus our priorities on what is important.  We can debate the latter, but let us at least open the debate.  This is change we can believe in.

I understand the notion of not caving into Russia on every action they take in their so-called “near-abroad.”  However, I wonder if NATO could have quietly “postponed” the military exercises in Georgia (which are part of its Partnership for Peace program, a name that probably appears like doublespeak to the Great Powers not participating, much like Ronald Reagan’s MX “Peacekeeper” missile). 

Mikheil Saakashvili, the president of Georgia who behaved irresponsibly last summer in that country’s conflict with Russia, is bolstered by the seeming Western support of his objectives.  A report on NATO’s exercises in Georgia appeared on the front page of China’s Xinhua news agency’s web site.  Are these military exercises in Georgia critical to the security of NATO’s members, and by undertaking them, are we encouraging Russia and China to help us (the West) achieve our priorities?  Read what NATO has to say about its relations with Georgia.