America’s IOU to California: One Political Overhaul

The National
2009-07-05 23:40:04Is California too big to fail? With taxpayers on the hook for the bailout of spectacular failures such as the insurance giant AIG and car maker General Motors, why shouldn't Washington save the Golden State? Politicians from California's state capital in Sacramento have already been to Washington, hat in hand. In June, a delegation of them persuaded top federal officials, starting with Timothy Geithner, the US Treasury secretary, to consider a rescue plan should the state go belly up. Well, this California native would thank the feds to keep their dole to themselves. In a country that insists on co-mingling "values" with policy, it is time to restore accountability and restraint as the core of democratic capitalism. California, the late, great frontier of libertarian virtue, is an appropriate place for it.The stakes could not be higher. California's GDP, at US$1.7 trillion (Dh6.24tn), not only accounts for 12 per cent of the US national output, it ranks as the eighth-largest worldwide. Yet for all its vast resources - the state leads the nation, if not the world, in agriculture, defence contracting, computer software, media and tourism - California has accumulated a $24 billion deficit that its gridlocked legislature has failed to reconcile. Last week, Arnold Schwarzenegger, the governor, announced the state would be forced to issue IOUs to cover outstanding debts that could swell to $4.8bn by August if politicians cannot reach a budget agreement by then. California, which has the worst credit rating of any state in the country and has already accumulated nearly $60bn worth of municipal bonds, refuses to cover revenue gaps by taking on more debt. Such restraint is encouraging, but it comes late in the process and means little without significant spending cuts. Martin Weiss, an analyst at Weiss Research - best known for having forecast the demise of Bear Stearns and Lehman Brothers last year - said last month the prospect of a default was "unavoidable". This is not the first time Sacramento has found itself on the brink of insolvency, however. The economy was hit hard by the collapse of the dot-com bubble and the defence sector's post-Cold War contraction, only to revive itself. Any state that can coexist with frequent onslaughts of fires, mudslides, earthquakes and religious cults can survive its current financial reckoning, assuming politicians are willing to roll up their sleeves and reform one of the most dysfunctional political regimes in the free world. California, to paraphrase Rick Blaine in Casablanca, is just like the rest of America, only more so. It is gluttonous; in the past five years alone, its budget has expanded by nearly 50 per cent, to $145bn. Its politics are more partisan, owing to a district representation system that entrenches incumbents and dissuades them from working with ideological rivals. Republicans and Democrats, as a result, habitually vote in opposition to one another on tax and spending bills. To make matters worse, California requires a two-thirds majority to pass its annual budget, one of only three US states to do so. Another burden on Sacramento is its chaotic "ballot box budgeting" system, which allows voters to support single interest programmes, from stem cell research to health and education issues, without identifying how they will be funded. The most notorious of these measures - Proposition 17, which became law in 1978 - gutted the state's revenue base by slashing property taxes, a move some analysts blame for much of the state's chronic funding gaps. Unlike its bush fires and floods, California's legislative process is a man-made disaster that can be corrected given the proper incentive - namely, the fear that Washington will refuse to come to its rescue. To do otherwise would hasten the final chapter of a state that once embodied that antique American quality of rugged individualism. Beginning in the 19th century, California became an El Dorado of the human spirit, a destination for innovators unafraid to fail. It lured moguls, thinkers, scoundrels and adventurers from everywhere. Levi Strauss created a clothing empire out of the state's legendary gold rush of 1849. William Randolph Hearst, the publisher, migrated from New York to San Francisco, where for a generation he dangled the fortunes of politicians, industrialists and warlords over the bonfire of his ambition. Amadeo Giannini, an Italian immigrant, built what would become the Bank of America by accepting handshakes as security against loans he wrote for victims of the 1906 San Francisco earthquake. Like all visionaries, men such as Strauss, Hearst and Giannini wanted the government out of their affairs when business was good - and they accepted their fate when things went south. So where do young entrepreneurs go today if they are willing to work without a net? Certainly not the US, where it appears no act of commercial malpractice is so severe it cannot be preserved with a drip feed of public funds. Hong Kong? Zagreb? The overweening dole has left us with few markets where it is OK to fail

Alliance Creep

Al-Sijill
2009-04-09 19:27:19In spring 1999, during the war in Kosovo, I was dispatched to Brussels to cover the North Atlantic Treaty Organization's bombing of Serbian targets. For several weeks, I button-holed diplomats and military attaches in the corridors of NATO headquarters to learn about the latest twists and turns in the campaign. Would the sustained offensive force Serbian leader Slobodan Milosevic to end his attacks on Albanian separatists? If not, would NATO intervene with ground forces? I attended the daily briefings by then-NATO spokesman Jamie Shea and spent a day interviewing military officials at Mons, the Allied operations command center. It was a glamorous assignment. How often does one mix with charming internationalists in the heart of Europe? But looking back, what I remember most clearly was the sense of urgency about the place. Yes, there was the crisis in the Balkans to reckon with. But there was also the clear need among NATO officials to show they were somehow necessary eight years after the Cold War ended. Not only had NATO preserved itself intact following the collapse of the Soviet Union, it actually expanded. By combining alarmist cant - a unified Germany, we were told, might emerge as a "Fourth Reich" if not for a robust coalition to manage it - with the political muscle of US defense contractors, NATO fast-tracked the inclusion of Poland, the Czech Republic, and Hungary into its fold. American hegemony was extended to a then-prostrate Russia's very front door. Opposition to such an advance - a few Sovietologists and foreign policy "realists" warned it might one day needlessly provoke Moscow - was ignored. Still, the Kosovo War had revealed fault lines in NATO's ranks. The Americans were complaining that the Europeans had failed to invest adequately in their military capability, leaving it to the US to bear the brunt of the bombing. Diplomats told me, sotto voce, that the Kosovo campaign would be a wake-up call for the alliance. NATO, they told me, was on the brink of failing its first real test since the collapse of the Soviet Union. If this did not concentrate minds in the capitals of Europe, surely NATO would not survive. I dutifully took notes. It all sounded so dire. That was a decade ago. Last week, on the occasion of NATO's sixtieth anniversary, US president Barack Obama visited Strasbourg, France, to celebrate the staying power of a Cold War anachronism. A defense treaty ordained as a counterweight against a long-dead adversary has, thanks to the September 11 terrorist attacks and the war in Afghanistan, found new life. Empires rise and fall. Entire species come and go. Intrepid political-military types, it seems, are forever. NATO is now consumed by a different war, but the intramural tensions remain. In 1999, US officials were griping that the Europeans were backsliding under Washington's security umbrella to back-slide. They wanted the allies to invest in next-generation technology, including surveillance and cargo aircraft and command and control systems, which they wanted them to buy from US arms manufactures rather than develop them domestically. This was important, said the Americans, to ensure alliance "inter-operability." Needless to say, American defense contractors emphatically concurred. Nothing has changed. The new entrants into the alliance defied Washington by purchasing billions of dollars worth of non-US fighter jets. ("We're not just a market for US defense firms," the ambassador to Hungary's liaison office to NATO told me during the Kosovo campaign. "When NATO is disappointed, I care. I don't care if Lockheed Martin is disappointed.") In Afghanistan, units that make up the coalition's expeditionary force are effectively segregated from each other because their weaponry, from communications equipment to ordnance, operates on different standards and frequencies. President Obama's eloquent appeals notwithstanding, many European NATO members are losing interest in the Afghan war. The Strasbourg summit yielded little in the way of new transatlantic commitments to the eight-year-old conflict, to which Mr. Obama has pledged 21,000 US troops this year. The war in Afghanistan is becoming as Americanized as many experts say it is unwinnable. Afghanistan may not necessarily be the place empires go to die (the Mongols had a pretty good run there, from the 13th to the 15th centuries), but it may be enough to bury the Obama presidency. In retrospect, it is clear that the war on Milosevic was more about protecting NATO's rice bowl than it was about the strategic interests of its members. Perversely identifying the use of armed might as an end in itself, US Senator John McCain said at the time that any vital stake the US may have had in the Balkans was less important than a show of raw American might the moment Washington threatened to unleash it. "Credibility is a strategic asset of the highest order," said Mr. McCain, "and well worth fighting to maintain." Incredibly, despite the looming quagmire in Afghanistan, the disaster of Iraq, and Russia's short but brutish war with Georgia last year, Cold War fetishizers like Mr. McCain are still aching to pick a fight with Moscow by extending NATO membership to both Georgia and Ukraine. One hopes Mr. Obama's fulsome rhetoric about NATO's precious credibility belies a realist's cold, clear instincts. Rather than expand NATO, the US should slowly disengage from it. Washington should end plans to build its missile-defense system, which is hideously expensive, unproven, and needlessly provocative of Russia. Despite the likelihood of minor cuts in the Pentagon budget, the US still accounts for half the world's defense outlays. That fact, together with America's bankrupt economy, should compel the White House to redefine as a rational foreign policy one that balances commitments with resources.

Attack of the Primitives

Al-Sijill
2009-03-19 19:22:38Last month I phoned Chas W. Freeman, a friend of mine, and asked him if he would read a draft chapter from a book I am writing about how US foreign policy has became militarized since the end of World War II. He graciously agreed and we chatted for awhile about his recent visit to Wenzhou, a Chinese coastal city known for its industrial and entrepreneurial fecundity. A former diplomat in Asia and a fluent Mandarin speaker - he was Richard Nixon's translator during his historic visit to China in 1972 - Chas knows the country well and I was eager for his thoughts about my subject. The chapter focused on the plight of America's "China Hands" - the young diplomats who reported to the State Department about the conflict between Chiang Kai-shek's Nationalist Party and Mao Zedong's Communists. Chiang, they cabled Washington, was corrupt and unpopular. The US, they said, would do well to abandon him to his fate and engage Mao, who though a Marxist, enjoyed considerable good will among the people and was no Soviet stooge. It was sage advice; the Communists easily overran the Nationalists and by 1950, boycotted by the US government, allied with Moscow. For their prophesy, the China Hands - Mandarin-speakers all, men who knew China more intimately that most Chinese - were not only ignored, they were destroyed by a confederacy of politicians, media barons, and Christian groups that zealously supported Chiang as both a Christian and an anti-Communist. The China Lobby, as it was known, would control America's East Asian policy until Nixon, a charter member of the group, established diplomatic relations with Beijing. Had President Harry Truman resisted the lobby's pressure and established relations with Mao, many historians agree, the Cold War would have been much shorter and far less violent. It is unlikely, for example that the US would have intervened in Vietnam. A few days after our conversation, it was reported that Chas was slated to be the chairman of the National Intelligence Council, the inter-agency group that prepares evaluations for the president and other top-level officials. It was an inspired choice; in addition to his Asia credentials, Chas, a former ambassador to Saudi Arabia, also knows the Middle East inside and out. Chas is also known for his blunt appraisals and serrated wit. Unlike the timid rabbits that make up the Washington apparat, he has vocally criticized Israel's occupation of Palestinian land and the influence of Israel's own lobby on America's Middle East policy. To his credit, director of national intelligence Dennis Blair said he recruited Chas because of his willingness to stir up trouble, not despite of it. He praised Chas for his "inventive mind" and on-the-ground experience in two regions that will have enormous impact on global affairs well into the next generation. I myself was buoyed by Chas's appointment as a sign that the Obama administration was more interested in thoughtful analysis of the world as it is - particularly in the Middle East - rather than the addled concoction of it that prevails in the Beltway. I was aware Chas had made powerful enemies with this defense of Palestinian rights but I assumed he was safe, particularly as the position did not require a potentially explosive Senate confirmation that might damage the White House on other fronts. If the Likudnik drones in Congress made a fuss, all Obama had to do was ignore it. Like Blair, however, I was naïve. The knives quickly came out - among the foot soldiers. The big guns, namely the American-Israel Political Affairs Committee, publicly kept to the sidelines. A blogger named Steve Rosen was among the first to sound the tocsins, attributing to Chas strategically edited remarks that read like apologia for Beijing's 1989 massacre of student-demonstrators in Tiananmen Square. (Along with context, Rosen's onslaught was also absent of any reference to the fact that Israel, as one of China's most important sources of arms, is a guarantor of Beijing's autocracy.) Speaking of context, the fact that Rosen is an ex-AIPAC official indicted for passing US intelligence to Israel in violation of the Espionage Act is all one needs to know about how perverted US-Israeli affairs can be. Rendering credibility to a character like Rosen would be like giving a fair hearing to an alleged spy from the Arab-American Political Action Committee who charges Rahm Emanuel, Obama's chief of staff, with conflicted loyalty because he reportedly has duel citizenship with Israel. And in fact, it was Emanuel who bore the brunt of Congressional outrage over Chas's appointment. Among other legislators, he was visited by a Democratic Representative named Steve Israel - as if this whole episode wasn't larded with enough irony - who told the Washington Post on March 10 that Blair's defense of Chas was "indefensible." So it's come to this. A career politician and Beltway habitué from New York's 2nd District is telling a former chief of the US Pacific Command, a man who led a carrier battle group in both the Atlantic and Pacific and who served on the National Security Council, what's best for American security. (The White House kept out of the affair; according to the Post, Blair was told he was on his own in this fight.) In 1950, journalist and China scholar Owen Lattimore responded to accusations by Senator Joe McCarthy that he was a high-level Communist spy: "I say to you gentlemen, that the sure way to destroy freedom of speech and the free expression of ideas and views is to attach to that freedom the penalty of abuse and vilification. If officials of our government cannot consult people of diverse views without exposing themselves to the kind of attack that Senator McCarthy has visited upon officers of the State Department, our government policy will necessarily be sterile. It is only from a diversity of views fully expressed and strongly advocated that sound policy is distilled. He who contributes to the destruction of this process is either a fool or an enemy of this country." Sadly, Lattimore's testimony resonates as strongly today as it did sixty years ago. Because of parochial politics, Americans have been deprived of a first-rate mind on issues vital to their security. Chas's lynching by functionaries with a pygmy-sized grasp of the Middle East and Asia proves that Washington has exchanged one totalitarian lobby for another. Full Article (in Arabic) (.pdf)

China, the Lifeline of America's Ailing Economy

The National
2009-03-10 19:42:58As if it were needed, Beijing served notice last week that despite the worldwide credit crunch, or perhaps because of it, China is still the most important economy on earth. No sooner did reports flicker across traders’ computer screens last Thursday about how China would soon unveil a new stimulus package than global stock and commodities markets sprang to life. The rebound was led by mining and resource companies such as Australia’s Rio Tinto, which happens to be on the receiving end of a US$19.5 billion (Dh71.62bn) equity investment from China’s largest aluminium producer. As it turned out, the official at the centre of those reports, Wen Jiabao, the Chinese premier, insisted he was misquoted and share prices resumed their grim slide the next day. But the point was lost on no one: the world may catch a cold when the US sneezes, but the potion for recovery is in Beijing, not Washington. Given the rate at which Barack Obama, the US president, is cutting promissory notes to global investors – which many economists agree is the only way out of the hole dug for him by his predecessor – the US is on its way to becoming one of the world’s most indebted economies as well as its largest. As America’s primary lender with more than $2 trillion in foreign reserves, China is doing more to keep the US economy alive than any other creditor nation. And its government is taking heat for it. The backdrop to Beijing’s rubber-stamp National People’s Congress (NPC), which started its annual meeting last week and concludes this Friday, is the growing demand among many Chinese – from industrialists to bankers to jobless migrant workers – that financial Mandarins such as Mr Wen transfer some of the country’s foreign exchange riches out of low-yielding dollar-denominated accounts and convert them into local currency so they can be invested at home. This is unlikely to happen any time soon. True, economic planners around the world are hoping China will double up on the 4 trillion yuan (Dh2.14tn) stimulus package it announced in November, just as Standard Chartered Bank suggested it might do in a report issued last week. But they’d prefer it be financed from Beijing’s national account and not from its war chest of foreign reserves. The moment word leaks out that China is dumping $1tn in greenbacks for yuan or perhaps another currency that offers better returns, the stimulus bill Mr Obama laboured so mightily last month to push through Congress won’t be worth yesterday’s dim sum. Nor is the Chinese government eager to do anything that would sharply depreciate the value of their hard-won hard currency. Fortunately, China has room to manoeuvre. Retail sales are high and lending is on the rise. At the NPC, Mr Wen and other senior officials have been projecting confidence that China would manage growth of more than 8 per cent amid signs that the economy is responding to the spending package despite plummeting export sales. (Some economists fear, however, that Beijing is trying to deflect the growing chorus of criticism with happy talk while providing few details about how funds from the stimulus package are to be spent.) That said, the global economic crisis is taking a huge toll on China’s export-led economy. An estimated 20 million to 40 million migrant labourers, part of an army of workers who over the last generation has flocked to the country’s urban areas in search of jobs, are now unemployed and heading home. Even worse, some 1.6 million college graduates are spilling into a stagnant job market. The worst fear of all Chinese leaders – thousands of people on a train heading for nowhere – is perilously close to being realised. Add to that the kind of disgruntled students who formed the core of the pro-democracy movement that led to the 1989 Tiananmen Square massacre, and you have the trace elements for conflagration. “There is fuel there,” said Charles Freeman, a China expert at the Centre for Strategic and International Studies in Washington. “Traditionally, the biggest source of concern for the leadership is a group of students that is politically dissatisfied, particularly if they ally with migrants.” Last week, Robert Zoellick, the president of the World Bank and one of the smartest people in Washington, referred to the US and Chinese economies as “the G-2”. Without healthy US-China commercial ties, he argued in a column he co-wrote for The Washington Post with Justin Yifu Lin, the bank’s chief economist, “the Group of 20 will disappoint”. Mr Zoellick is right. Given America’s critical dependence on Beijing as the very lifeline of its economy, it is also fair to say that within this exclusive group, China is first among equals.

Finding the Reset Button at the State Department

Al-Sijill
2009-03-12 15:02:59Set aside for a moment Hillary Clinton's mealy-mouthed assertion last week that expanding West Bank settlements is "unhelpful" to the goal of Middle East peace. After all, no one expected her to express anything more than wan protest at the colonizing of Palestinian land on her first Middle East visit as Secretary of State. Instead, let's focus on Mrs. Clinton's offering to Russian Foreign Minister Sergey V. Lavrov during their meeting in Geneva: a "reset" button to illustrate President Barack Obama's desire to repair Washington's Bush-battered relations with Moscow. When Lavrov good naturedly pointed out that the inscription on the button was mistranslated - it came out as "overcharge" rather than "reset" - Clinton laughed off the episode and moved on. Fair enough. But there was something revealing about the oversight. Think about it: the world's most powerful country, which maintains fortress-like missions staffed by thousands of people around the world, apparently can't come up with a Russian-speaker on the fly. Couldn't the Deputy Assistant Secretary for Gag Gifts and Witty Rejoinders put in a call to the US embassy in Moscow for a proper translation? Had I known, I could have phoned Strobe Talbott, a former Deputy Secretary of State and Russophile who hangs out at the same guitar shop I do, and appealed to him for help. Trivial as it seems, the botched-button incident is symptomatic of a deeper malaise that afflicts America's diplomatic corps, one Clinton herself has vowed to remedy. It may not seem like it, given the enormous US embassy in Abdoun (assuming it hasn't gone into foreclosure), but America's diplomatic resources are stretched reed thin. In June 2008, according to F. Anthony Holmes of the Council on Foreign Relations, there were only 6,636 Foreign Service Officers in the State Department, just ten percent more than 25 years ago, when there were 24 fewer countries in the world. The gap between human resources and workload is so wide that FSOs receive little training because there is no one to cover for them in their absence. America's diplomatic missions suffer from a vacancy rate of 30 percent in Africa and 21 percent overall. Vital work is being neglected, particularly in post-conflict areas; the number of FSOs seconded to the United States Agency for International Development has declined by 75 percent since the 1970s. True, President Barack Obama's fiscal 2010 budget calls for a multi-year effort to significantly increase the size of the Foreign Service at both the Department of State and USAID. Not only does the foreign service welcome such a reprieve, so do senior military officers. Secretary of Defense Robert Gates has lamented what he calls the "militarization" of US foreign policy and has called for a strengthening of America's diplomatic muscle. Late last month, Admiral Mike Mullen, the Chairman of the Joint Chiefs of Staff, called for a greater emphasis of "non-military instruments of international influence...and capabilities for American diplomacy." How did the US Department of State, once the fountainhead of US foreign policy and the face of America overseas, become so diminished? It has been a long recessional, to quote Rudyard Kipling, one that intensified under Mrs. Clinton's predecessor, Condoleezza Rice. Having declared herself in a January 2006 speech for "bold diplomacy...that seeks to change the world," Ms. Rice failed to lobby for additional funding to underwrite her sweeping vision. As Mr. Holmes, a former ambassador to Burkina Faso, writes in the January/February edition of Foreign Affairs, "diplomats need well-funded programs in order to have more than a symbolic impact. These programs do no exist. They were never requested, and the 300 people reassigned to strategically important developing countries over the past three years have had virtually no new resources to work with." Just as damaging to US diplomacy, according to Mr. Holmes, was a culture of fear that discouraged dissent. "Officers who dared to give unvarnished analysis of policy options," he writes, "have been ignored, penalized, or banished. In some bureaus, the number of politically appointed ‘special advisers' - who in effect function as political commissars by enforcing policy discipline regardless of events on the ground - has increased dramatically." This became clear in the Bush administration's first term, particularly as it related to the State Department's Bureau of Near Eastern Affairs, its preserve of Arab experts. Officers like Ron Schlicher, for example, a veteran FSO and fluent Arabic speaker with experience in places like Cairo and Jerusalem, were the kind of diplomats who in another era would have been fast-tracked for senior posts in the Middle East. In 2004, Schlicher was awarded the American Foreign Service Association's annual prize for producing the Department's best "dissent" cables, part of a tradition of robust internal debate. But Schlicher was careful not to boast about his prize lest he provoke a backlash from the very White House whose policies he challenged in the State Department's once-proud Open Forum system. Today, writes Mr. Holmes, "it has become increasingly difficult for the American Foreign Service Association, the exclusive representative of the entire Foreign Service, to elicit nominations for its annual Constructive Dissent awards, because voicing criticism of US policy is now so rare." A shortage of personnel and a climate of fear is a weak platform for assertive, confident diplomacy. If Mrs. Clinton is serious about reviving America's civilian representation abroad, she'll need more money than Congress is willing to allocate and stronger leadership than her predecessor was capable of delivering. If anything, it's the Department of State that needs to be reset. Full Article (in Arabic) (.pdf)

Opportunity Lost, Part I: A Plan for a Key Gaza Crossing Was Foiled by Israel after Hamas' Election Victory

Al-Sijill 2009-02-05 19:00:47The Karni crossing is Gaza’s main artery for trade, with the capacity to process more than a thousand truck crossings a day. Following the outbreak of the second Intifada, however, Israel imposed a tight inspection regime on its side of the Karni terminal that reduced throughput to a trickle. As part of a 2005 US-brokered initiative to improve economic conditions in the West Bank and Gaza, Israel agreed to ease its control over Palestinian roads and border crossings in exchange for American-funded improvements of Palestinian inspection systems and security forces. Between the signing of the accord and Hamas’ seizure of Gaza in November 2007, hard-liners in Israel and their allies in Washington managed to thwart the deal. How they did it, to be recounted here in a two-part series, offers a glimpse of the obstacles President Barack Obama might face should he seriously negotiate on behalf of a Palestinian state with a viable economy as its foundation. Ephraim Sneh, a leader of Israel’s pro-peace movement and a former aid to Yitzhak Rabin, is used to the political wilderness. Not long after Rabin’s killing in 1996, he pushed Israel and the US government to buttress the Oslo process by investing in the Palestinian economy. He presented then-US ambassador to Israel Martin Indyk and other senior US policymakers with a list of seven projects that would give ordinary Palestinians a stake in a peaceful future. They included a new airport at the Kallandia refugee camp, sea ports at Gaza, desalination plans – and a modern cargo terminal at Karni. “If you change the economic reality you can change the political reality,” Sneh told the Americans. “By improving the Palestinian economy, you can fight terrorism.” No one listened to him. Nearly a decade later, with Israeli roadblocks in the West Bank and the incarceration of Gaza bleeding the Palestinian economy white, Sneh was vindicated. The former commando and brigadier general was given responsibility for Israel’s commitments under the Access and Mobility Agreement, which was signed in November 2005 in response to heavy pressure from then-Secretary of State Condoleezza Rice. At the heart of the agreement was a vision Sneh, a fluent Arabic speaker and a former occupation governor of the West Bank, had nurtured for many years: the development of Karni and other Palestinian border crossings into efficient and secure entrepôts for trade. The agreement set ambitious goals for itself, particularly as it related to Karni. The Palestinians on their side would be given tens of millions of dollars to train border guards, build new roads, and install security and payroll systems, while the Israelis would be provided with $12 million worth of state-of-the-art scanning and surveillance equipment. By late January 2006, according to the agreement, truck crossings would reach 1,200 a day, a third of which would be carrying goods made by Palestinians for sale abroad, a crucial source of foreign exchange for the impoverished Gaza strip. The project was quickly snagged, however, on a dispute between Israel and the US Agency for International Development over the scanning equipment. Due to the tight deadlines imposed by the agreement – the scanners needed to be in place by December 31, 2005 – it was decided USAID would first lease the surveillance systems and purchase new ones later on. The leases were signed on December 8 and a few weeks later the scanners were flown from Europe to Tel Aviv on a Russian Antonov 225, the world’s largest cargo jet, at a cost of $500,000. Such an elaborate charter was necessary, according to a December 2006 USAID report, given the size of the equipment and the urgency of the situation. Once the scanners were delivered, a herd of Israeli bureaucracies – from the Ministry of Defense to the Israeli Airport Authority – submitted to USAID a list of demands for adjustments and alterations that would cost the US government an estimated $6 million to address. The list, according to an official with Chemonics, USAID’s contracting agent on the project, ranged from the substantive – for example, Israel wanted the capacity to scan three trucks at once, which required extensive retrofits and new software – to the trivial, such as a request that the nickel doorknobs in the scanners’ control rooms be replaced with brass ones. It took six months to address Israel’s conditions even after they had been narrowed down by USAID. A careful reading of the USAID report suggests Israel was trying to sabotage the mobility agreement by delaying integration of the scanners. “The majority of retrofitting tasks required extensive technical modification and in several instances, delayed or interrupted equipment deployment and operations at several sites,” the report states. “These initiatives, while justifiable in the context of [the defense ministry’s] concerns, have been perceived by the suppliers as excessive and redundant for leased equipment.” In January 2006, USAID began negotiating for the purchase of the replacement scanners. Five companies expressed an interest in the project, but nearly all of them complained of a battery of new restrictions imposed by Israel. The Israeli side, they said, was demanding technology that would have to be developed from scratch even as it desired a system already in production and with a performance record of two years. It also insisted on having a majority of seats on a committee to evaluate the scanners as opposed to the customary single-seat, third-party representation, and it wanted the evaluation process to take 90 days instead of the usual three weeks. These and other conditions would have delayed deployment of the new scanners by at least two months, according to USAID. When the frustrated bidding companies threatened to walk out of the negotiations, USAID unilaterally signed a contract with AS&E, a US-Chinese joint venture. Outraged, a senior Israeli defense official filed a formal protest to the US embassy complaining that USAID’s pre-emptive action jeopardized Israeli security. USAID was then instructed to write a letter to the defense ministry reaffirming the centrality of its security concerns, but the contract was honored. The dispute over the scanners had been resolved, though Israel’s demands for retrofits would delay their full deployment for several months. As a result, cargo traffic at Karni would be kept to a paltry few hundred truck crossings a day. But after Hamas’ victory in parliamentary elections in January 2006, it no longer mattered. Well before the first vote was cast, Israel’s allies in Washington were mobilizing for the internment of Palestine.

To a Bailout Economy: Defense Contractors Fight Budget Cuts With Jobs Promises

US News & World Report
2009-02-27 14:41:22Leave it to the merchants of war to mount a nimble rearguard action. America's defense contractors, who never shied from exploiting the Iraq war for commercial gain, are now marketing themselves as a critical source of employment amid murmurs of the most significant cuts in defense spending in a generation. Production of components for missile defense systems sustains 1,936 jobs and generates $192 million annually for the economy of the state of Arizona, Boeing points out in a recent press release. The F-22 Raptor has created 44,000 jobs nationwide, says Lockheed Martin, the company that builds the state-of-the-art fighter jet. The U.S. auto industry may be on life support, but the Army's Future Combat Systems program is keeping 1,678 people employed, declares the U.S. Army. Well-to borrow that underappreciated phrase from Marilyn Rice-Davies-they would, wouldn't they? The Pentagon, after all, is no more willing to see the dispatching of its budget ox than any other government agency. The Office of Management and Budget announced last week that the Obama administration is setting the Pentagon's 2010 budget at $524 billion, about $60 billion below its draft spending plan. Even Secretary of Defense Robert Gates has warned the Pentagon that its wish list for costly, high-tech weaponry may be pared back at a time when two simultaneous wars have depleted the military of more basic warfighting wares. Arms makers are not the only one who have cause for concern. In case you haven't noticed it, the War on Terror is over. Reporters in Washington have recently noted how President Barack Obama has all but jettisoned the term, which had no redeeming value except as a device to scare voters, cow lawmakers-and sustain a national security budget that made Washington the epicenter of Terror Inc. Following the 9/11 terrorist attacks, Congress allocated billions of dollars for states to shore up their defenses against a future assault. (In a cautionary tale for those following the negotiations over Mr. Obama's economic stimulus plan, much of those funds ended up paying for pork-barrel projects that had nothing to do with national defense.) To ensure a larger slice of the counter-terrorism pie, governors hired armies of Washington lobbyists to plead their case to Congress. To win their share of related business, security companies hired consulting agencies to polish their bids and presentations. The consulting agencies, in turn, hired more staff and rented larger, more elegant office space. That increased the demand for office buildings, which created the need for builders, which meant more building tools and materials. Within months, Terror Inc. had spawned the Terror Economy, a vortex of new weapons and warriors, Jersey barriers, commercial property agents, PowerPoint presenters, uniform designers, arms-show caterers, systems integrators, and software creators. Well before mid-2007, when America's bubble economy finally burst, Washington, D.C., had become a Jerusalem of terror where thousands of security specialists, contractors, consultants, and pundits would gather to peddle their orthodoxy and replenish their address books. Their mass exodus to Washington fueled a construction boom so extensive that entire city blocks were cordoned off for months. The economic output that was lost to traffic snarls and other burdens on the city's blighted infrastructure was more than compensated for by the demand for hotel conference rooms, embassy security, and duck tape. Now that the War on Terror is over, what will sustain Washington as the New Acropolis? Why, the Bailout Economy, of course. Mr. Obama's massive stimulus package will make the states more dependent on Washington than ever. Conveniently, the people who will dominate the Bailout Economy are already in place. The same lobbyists who worked Congress for antiterrorist funding will cajole lawmakers for money for new roads and airports. The same companies that bagged the big deals of the Terror Economy-the highly diversified Lockheed Martins, Raytheons, and Boeings-will build the Bailout Economy's energy grids, rail links, and computer networks. That, after all, is how Washington works. Not for nothing has the city been likened to a giant rotisserie of the same warmed-over faces and corporate logos. Consider Mr. Obama's cabinet of Clinton-era retreads. The same people who helped do in the Real Economy with an overdose of financial deregulation-Director of the National Economic Council Larry Summers, for example, or Treasury Secretary Timothy Geithner-are now back in charge. No matter. The Terror Economy is dead. Long live the Bailout Economy. Pity the taxpayer.

Sowing Dragon's Teeth

Al-Sijill
2009-02-26 22:53:02At least one enterprise is recession-proof: selling arms to Arabs. This week's International Defense Exhibition & Conference, the Middle East's top arms show, was the largest one ever held. Thousands of arms producers and buyers made the pilgrimage to host-city Abu Dhabi to marvel at the "defense solutions" - euphemism is an arms industry art - on display. IDEX is the Jerusalem of arms sales these days; Arab government's appetite for new weaponry is undiminished despite the global recession and falling oil prices, and Iraq - war-torn, fragile Iraq - has become a growth market in the bazaar. Baghdad will soon take delivery of a package of $11 billion worth of new weapons, including C130 transport aircraft and assault helicopters armed with Hellfire anti-tank guided missiles. The cornerstone of the deal, however, is the M1 main battle tank. Iraq will buy 140 of them, variants of which are already deployed in far greater numbers by Egypt, Saudi Arabia, and Kuwait. Even a relatively small complement of M1s is enough to give pause to Iraq's neighbor and ancient rival, however. Iranians remembers well the terrors of their war with Saddam Hussein's armies, which lasted nearly the whole of the 1980s and claimed a half-million lives, many of them civilian. Tehran has little to worry about, at least for now. A hundred or so M1s are hardly a threat to massive, mountainous Iran. (Besides, the explosive devices Iran has fashioned for Iraqi insurgents have managed to penetrate the M1's armor.) Truth be told, the arsenal Iraq is procuring from the US is more likely to be deployed against domestic challenges to Baghdad's authority - a Kurdish grab of disputed Kirkuk, for example - than against any threats from abroad. Still, motorized armor and air transport gives Baghdad the ability to project force well beyond the 200 kilometer radius the Pentagon had early prescribed for Iraq's military. Plus, Baghdad's purchase of the M1 and other American-made weapons will create an enduringly umbilical link between the two countries long after the bulk of US troops are withdrawn from the country. Ahead of a visit to Washington two weeks ago, Iraq's defense minister told reporters that the US-South Korea military relationship could be a model for Iraq-US ties. (Note to Iraqis: American forces arrived on the Korean peninsula in 1951 and show no sign of leaving anytime soon.) "With all this hardware comes the need for US maintenance and spare parts," says Nathan Hughes, an analyst at Stratfor, the global intelligence company. "It builds the foundation for cooperation, for training, upgrades, and also doctrinal links. This gives the US a foothold in Iraq." The US is not alone. France, for example, which along with the Russians was a major supplier to Saddam Hussein, has signaled its willingness to help Baghdad rearm itself. And it's not as if there isn't plenty of business to go around the region. In 2007, the Bush administration and other governments made available to the Gulf states state-of-the-art weaponry at discounted prices as a counterweight to the looming threat from Iran. Arab governments responded with alacrity, racking up some $20 billion in orders "out of fear," according to the Washington Post, "that US military installations on their territory would make them targets in an American war with Iran." What could be more Orwellian than that? Buying weapons to protect yourself from the threat posed by the presence of other weapons. Every country has a responsibility to protect itself, particularly in a neighborhood as dangerous as the Middle East. Yet for all the hand-wringing over Tehran as a "regional power" and the addled musings of its president, Mahmoud Ahmadi-Nejad, it's worth noting that Iran is one of the most screwed-up countries on Earth. Its economy is Balkanized by the Pasdaran, the Revolutionary Guard that has developed its own commercial empire, and the Bonyads, the charitable groups run by ex-ministers that are engorging themselves on the country's hugely corrupt privatization program. Its youth suffers from an AIDS epidemic, rising drug-addiction rates, and a jobless level of about 20 percent. The number of working-age adults entering the economy is growing at about 4 percent a year, among the highest such rates in the world. Inflation is in double digits, the consequence of entrenched subsidies funded by oil revenue. And in fact, Iran cannot even take its petroleum riches for granted, however. Because of chronic underinvestment in the country's energy fields, Tehran is expected to be a net oil importer by 2020. Far from being a cohesive autocracy and geopolitical giant, Iran is so fractured economically it is practically ungovernable. All of which is cold comfort for Israel and the Arab world's ruling establishment, sitting as they are in the cross-hairs of Iranian proxies Hamas and Hezbollah. But those are asymmetrical threats against which battle tanks and attack helicopters are of dubious value, as demonstrated by Israel's inconclusive war on Gaza and its failed 2006 conflict in southern Lebanon. Ditto Iran's nuclear ambitions, a product of Persian ego and insecurity that is unlikely to be disposed of absent the declaration of the Middle East as a nuclear-free zone, which is about as likely as an Israeli pavilion at this week's IDEX. With cuts slated for the Pentagon's $100 billion arms procurement budget, the Middle East remains a lucrative trough for US defense contractors. Thankfully for them, they have an able pitch man in Mr. Ahmadi-Nejad. The "post-9/11 arms spigot" as US Defense Secretary Robert Gates called it, may indeed be closing, but there's still a torrent of deals to be cut in the Arab world. Of course, given the region's instability, it is entirely possible that the weapons sold to one regime today could end up in the hands of a very different one some years down the road. The Chinese call this "sowing dragon's teeth."

China Moves On While the US Bickers

The National 2009-02-17 21:44:56There is more than one way to jump-start an economy. The American way – the sausage-factory way – entered a new phase last week with the passage of a US$787 billion (Dh2.89 trillion) stimulus package by a bitterly divided Congress. Having begun with a White House pledge of bipartisanship two weeks ago, the debate over the stimulus package proposed by the US President, Barack Obama, descended into reciprocal charges of bad faith and impugned motives. Republicans demanded aggressive tax cuts and recoiled at the bill’s spending programmes, which they said represented a huge burden for an unborn generation of taxpayers. Democrats pointed out that Republicans had just taken a drubbing in national elections in response to an economic implosion that happened on their watch. Republicans threatened to derail the bill with a filibuster, or deliberate delaying tactic. Democrats countered by accusing the Republicans of holding a fragile economy hostage to the kind of supply-side economic orthodoxy that led to the recession in the first place. In the end, the 1,100-page bill was passed by the Senate after three moderate Republicans defected to Mr Obama’s side. The package includes $212bn in tax relief, while the balance will be spent on everything from new housing and transport projects to energy and water systems. Much of those outlays will be channelled through state governments, which have the authority to spend the money pretty much however they see fit, including debt reduction, which will do little to generate new jobs. Nor is the bill structured for a quick-fix; its spending mechanisms won’t kick in fully until 2010 or even 2011, while adding more debt – about $1tn including interest rate payments – than the combined value of the first three years of budget shortfalls under the former president, George W Bush. And this is just one component to Mr Obama’s recovery plan. Last week, the Treasury secretary, Timothy Geithner – having just survived a minor scandal involving some $34,000 in back taxes – announced the details of his financial sector rescue plan, which is at least as important for recovery as the stimulus package. Neither Mr Geithner nor his plan, which could cost as much as $1tn to implement, inspired much confidence. Stock investors panned Mr Geithner’s less than charismatic delivery and a lack of details about the plan itself, in particular an ambitious public-private partnership to buy bad assets. The Dow Jones Industrial Average shed 4.6 per cent of its value for the day, and was left wallowing at its lowest level since Mr Obama’s inauguration. Then there is the Chinese way. In November, Beijing announced its own stimulus package which, at 4tn yuan (Dh2.1tn), is far larger as a percentage of its economy than is Washington’s version. Needless to say, China’s political leaders are unburdened with such trifles as legislative procedure. When they looked in their rear-view mirrors last autumn and saw the global recession coming after them, they simply huddled with their finance mandarins and authorised a transfer from their $1.95tn in foreign exchange reserves to the financial system. Chinese banks, unlike their bad-debt-plagued US counterparts, are reviving the economy by writing loans. The value of new borrowing last month, at $237bn, was more than double the record set a year earlier, according to Beijing’s central bank, and construction of new public works, housing developments and railway lines is well under way. The price of steel has soared and the decline in industrial output has been arrested. Despite a decline in exports – China’s lifeblood – a survey of 14 economists posted last week by Bloomberg News suggested China could be the first economy to recover from the global slowdown thanks to increased consumption and investment. They anticipate annualised growth of between 6 per cent and 8 per cent, which China needs to regenerate the tens of millions of jobs that have been lost in the past few months. Has China, the world’s third-largest economy, already turned the corner? Could this be the beginning of the great “rebalancing” of global trade flows as Chinese consumers learn to spend and Americans learn to save? It will take six months to say for sure. If anything, the unseemly haggling in Washington and the legislative and political battles to come underline just how deep is America’s economic hole relative to China’s. While toxic debt did much to trigger the US recession, the amount of debt overall – an estimated several trillion dollars over the life of Mr Obama’s first term – will make a US recovery that much more difficult. Whether they like it or not, Americans will have to re-evaluate the fundamentals of their free-market economy, from the virtue of home ownership to the viability of suburban living. China, on the other hand, has only to keep doing what it has been doing.

Opportunity Lost, Part II: The Consequences of Incarceration

Al-Sijill 2009-02-12 21:48:57The chaos in Gaza can be traced back to a failed US initiative to ease Israeli pressure on the Palestinian economy. The 2005 Access and Mobility Agreement was subverted, first by Israeli foot-dragging in negotiations with the US government over the terms of a high-tech scanner network, and later, after Hamas's January 2006 victory in parliamentary elections, by Israel's hawkish friends in Washington. However sincere President Barack Obama may be in his quest for Middle East peace, the sad story of the AMA reveals how entrenched in the American political process are interest groups hostile to the prospect of an independent Palestine and a viable economy on which to build it.

Washington responded to Hamas’s election triumph with a financial embargo on the Palestinian Authority. The Access and Mobility Agreement was all but frozen, particularly as it related to the Karni crossing, Gaza’s main artery for trade. On average, only some 20 trucks crossed into and out of Gaza in 2006, about 5 percent of the volume targeted by the mobility accords. A year after the US sanctions took root, the World Bank had declared Karni’s operations as “unacceptable.” The Gazan economy continued to deteriorate and by mid-2007 the United Nations was warning of a humanitarian crisis.

Though few observers on the US side were expecting Hamas’s landslide win, the American Israel Political Affairs Committee was taking no chances. Well before the vote, the Washington-based lobbying group was circulating memos to lawmakers encouraging them to reject any Palestinian government in which Hamas had a role. (AIPAC keeps a meticulous record of how American lawmakers vote on Israel-related legislation. It regularly asks a friendly Senator or House member to demand a roll-call vote so it can “score” members for their voter loyalty, then publishes the results in AIPAC Insider, the group’s quarterly periodical.) On its website, AIPAC took credit for mid-wiving House Resolution 575, signed on November 18, 2005, which declares that “Hamas and other terrorist organizations should not participate in elections held by the Palestinian Authority.”

Within days of Hamas’s victory, and with AIPAC assiduously working the process, two draft resolutions were introduced from the House of Representatives and one from the Senate. Language from the bills was synthesized into a small provision and inserted into an emergency funding bill for the Iraq war, which was signed into law on June 15, 2006. The provision forbids “appropriations for foreign operations, export financing, and related programs … for assistance to the Palestinian Authority.” Unusually, the legislation denied the president a waiver authority.

With the stroke of a pen in Washington, all US-funded projects in Palestine were cut off. They included programs to make the Palestinian judiciary more transparent, to train and educate its police force, and to professionalize the Palestinian election commission. In a June 23 memo, USAID instructed its contractors in the West Bank and Gaza to “ensure no funds are expended which could be considered as assistance to the Palestinian Authority.” European donors largely followed suit.

For Keith Dayton, the legislation was a surprise attack on his efforts to upgrade the Karni crossing. Only a month or so before the Palestinian elections, the US Army lieutenant general and former Pentagon policy planner had been appointed by the State Department as its security coordinator on the project. Suddenly, he and his team of experts were prohibited from dealing directly with any member of the Palestinian government other than President Mahmoud Abbas. To compensate, a detail of Canadian military officers and engineers were brought in to act as proxies for the Americans.

Lacking the US funds he requested to strengthen security and to bolster economic activity on the Palestinian side of the crossing, Dayton was reduced to cobbling together non-US aid on a piecemeal basis. He and his team persuaded a Dutch NGO to help finance a flower farm, for example, and dollops of aid were cajoled from Turkey and Sweden. They managed to raise C$1.2 million from the Canadian government to buy security cameras, and a British aid agency agreed to train border guards and build a new mess hall.

For four weeks in January, Gaza erupted into an urban killing ground as gunmen from Fatah and Hamas, following months of tensions, engaged in running street battles. To avert a civil war, King Abdullah of Saudi Arabia invited leaders from the two sides to Mecca, where they hammered out a truce that became the foundation for a Hamas-led unity government. To shore up Abbas, and to preempt a wider conflict, the Bush administration in January 2007 announced it would provide the president’s office with some $86 million in aid, $16 million of which was to be invested in Karni. But when the aid package was submitted to Capitol Hill for approval, Congress blocked it. Nita Lowey, a legislator who chairs the State and Foreign Operations subcommittee of the House Appropriations Committee, said she placed a hold on the package out of fear that some of the money could find its way into the coffers of Hamas.

The freeze perplexed many observers in Washington. After all, they argued, the aid was to be distributed not in cash but in kind, as items and services like computers and training procured by the Dayton team. Capitol Hill sources say Lowey made her decision after meeting with Daniel Ayalon, Israel’s then- ambassador to Washington, “who makes no distinction between Hamas and Fatah,” according to a legislative aid who requested anonymity.

In mid-March, a few weeks after Lowey’s decision, Ephraim Sneh, who was managing Israel’s side of the AMA, traveled to Washington for the annual leadership conference of AIPAC. There, he admonished the group’s members for not supporting the Karni redevelopment as a cornerstone of the mobility agreement. He called on the offices of Lowey and the late Tom Lantos, the California representative who was a co-sponsor of the anti-Hamas bills, and emphasized the importance of Karni. He and an aid from the defense ministry also met with members and staff of the foreign relations and foreign appropriations committees. At every stop, Sneh delivered the same message: what’s good for the Gazan economy is good for the state of Israel.

Eventually, some funds were released for Dayton’s operations. But by then it was too late. In June, Hamas overran US-backed Fatah forces in a brief but bloody civil war. Soon after that, radical groups unleashed their rocket attacks on southern Israel.

Barack Obama, Robert Gates, and the Rumsfeld Pentagon-State Relationship

US News & World Report 2009-01-07 19:10:08They used to make movies about men like Robert Gates, redemptive tales of the quiet hero who is called in to save a desperate situation and, through grit, cunning, and fair play, prevails against impossible odds. Fade to black; roll credits. But not yet for Citizen Gates. The U.S. secretary of defense, who has spent the past two years cleaning up after his inimical predecessor, Donald Rumsfeld, has been asked by President-elect Barack Obama to remain for the new administration's transition period. In many ways, it is an inspired choice. Since his appointment in 2006, Gates has worked assiduously to salve alliances estranged by Bush unilateralism. He has criticized the Pentagon's new weapons systems, including the $65 billion F-22 fighter program, as extravagant and outdated. Most admirably, he has called for a revival of American diplomacy with an expansion of the State Department's foreign service, which, he points out, has fewer diplomats than the Pentagon has lawyers. (With an annual budget of over $500 billion, the Defense Department spends more than 50 times as much as Foggy Bottom.) Beneath Gates's reaffirming Hollywood narrative, however, is a noir subtext. For the soft-spoken, gray-flanneled defense secretary has defined Pentagon authority more broadly and more aggressively than any of his predecessors. While warning against the militarization of U.S. foreign policy, as he did in a noteworthy July speech, Gates has done less to empower the State Department and more to entrench the concept of civilian-military partnerships in "stability operations"—Pentagon jargon for the rebuilding of failed states before they become incubators of radical Islam. If neglected civilian agencies cannot keep up with the abundantly resourced military, Gates has implied, the Pentagon will take the lead, and often in areas where it was once prohibited from going. A Rumsfeld legacy that Gates has pointedly not repealed is Pentagon Directive 3000.05. It declares that "U.S. military forces shall be prepared to perform all tasks necessary to establish or maintain order [in unstable or post-conflict areas] when civilians cannot do so." Such tasks, according to the directive, include the rebuilding of security forces, correctional facilities, and judicial systems, as well as reviving private enterprise, constructing or repairing critical infrastructure, and developing representative government. Lest there be any confusion about the chain of command in such operations, Directive 3000.05 states that the Defense Department "shall continue to lead and support the development of military-civilian teams." Such a sweeping interpretation of Pentagon authority has rattled civilian aid agencies like the United States Agency for International Development and its NGO partners, which are opposed to working closely with the U.S. military on practical grounds as well as moral ones. While the goal of civilian aid workers is to establish sustainable programs aimed at improving people's lives, the military is in the business of winning allies in the war against radical Islam. Civilian groups note how military officers, in an attempt to win over a prominent sheik or warlord in Afghanistan or Iraq, for example, have built schools and healthcare centers in remote areas that quickly fell into disrepair. They also point out that associating with U.S. soldiers and marines exposes their staffs to possible reprisal from hostile regimes. "If we become identified with the military, we become compromised," says George Rupp, president and CEO of the International Rescue Committee. "We should stay in our lane, and [the military] should stay in theirs." The money that supports the Pentagon's nonlethal activity comes largely from its so-called Global Train and Equip budget, another holdover from the Rumsfeld era that has been expanded under Gates. This $300 million fund, established under Section 1206 of the 2006 Defense Authorization Act, was set aside originally to finance counterterrorist activity in Iraq and Afghanistan. Today, 1206 programs flourish from Colombia to Pakistan. Since the launch of 1206, the U.S. military has effectively taken the lead in funding foreign armies, a responsibility that under the Foreign Assistance Act of 1961 belongs to the State Department. (A related provision under Section 1207 funds humanitarian work carried out in tandem with AID.) Outlays under Section 1206 require the concurrence of the secretary of state, which technically makes them compliant with the FAA. But legal experts in the NGO community and on Capitol Hill say the breadth of 1206 funding is beyond Congress's oversight capacity. Ordinarily pliant in response to Pentagon budget requests, Congress is drawing the line on 1206 spending. Lawmakers resisted Gates's demands in 2008 for a doubling of its budget, removal of oversight obligations, and exemption from legislation that prohibits U.S. support of regimes with poor human rights records. (The Defense Department had been working with Pakistan's autocratic Pervez Musharraf under a special exemption until his ouster in 2008.) Lawmakers also refused the secretary's request that 1206 authority be made a permanently budgeted item rather than a two-year revolving allocation. "Section 1206 is just one step in the growing migration of civilian work from the State Department to Defense," says George Withers, a senior fellow at the Washington Office on Latin America. "Clearly, Congress is concerned." However welcome Gates's vocal support for a more robust diplomatic corps, his demand for enhanced funding authority and the expansive language of Directive 3000.05 contributes to the very militarization of U.S. foreign policy he claims to abhor. (He has an enabler in Condoleezza Rice, who by submitting to Pentagon aggrandizement of what was once the work of diplomats has distinguished herself as the weakest secretary of state since Dean Rusk.) It is not enough to call for parity between America's military assets and its diplomatic ones. Until the State Department is restored to the pre-eminence it enjoyed immediately after World War II, the constitutional imperative of civilian-led foreign policy will become more pretense than reality. If that means shifting at least a portion of the Pentagon's procurement budget to Foggy Bottom—the F-22 would be a good place to start—then so be it.

Exorcism By Half

Al-Sijill 2008-11-13 17:30:14Senator Barak Obama entered the 2008 presidential campaign with a full ledger, and the entries on either side more or less balanced out.

His liabilities were daunting: a black man with a Muslim heritage, young and with limited experience as a federal legislator. He opposed far more seasoned pretenders, including Hillary Clinton, his fellow senator and presumed heir apparent to the dynasty begun by her husband and rudely slashed by the Bush interregnum.

His assets were equally formidable. Not since John F. Kennedy’s 1960 presidential run have voters beheld so universally attractive a candidate: He was articulate in a society where oratory had become a rare artifact. He was at once cool, cunning, and fiercely intelligent, as elegant a public speaker as Ronald Reagan and as seductive a stage presence as Bill Clinton, minus the gluttony. Clearly a shrewd judge of character, he surrounded himself with men and women whose reserves of competence and discipline were at parity with his own.

Then there were the extraordinary items, which thankfully for Mr. Obama broke almost exclusively his way. He would campaign amid the rubble of an incumbent presidency that began sabotaging itself almost immediately after its re-election in 2004 with a disastrous plan to privatize Social Security. This was followed by Hurricane Katrina, the sectarian holocaust in Iraq, the indictment of a top White House aid for compromising a CIA operative, revelations of warrantless wiretapping, the politicalization of the country’s once-sacred Justice Department, and finally and decisively, the collapse of Wall Street and the onset of economic recession. When measured against the tragic-comic demise of the Bush presidency, Mr. Obama’s liabilities seem to deflate significantly.

That being the case, was the young Senator’s victory truly the historic, transcendent event it is held to be? Were Americans really converted by Mr. Obama’s accomplishments and his humanist appeals to tolerance and civility? Or did they simply rebel against eight years of Republican misrule, which clung to Republican challenger John McCain like the smell of death?

Certainly Mr. Obama’s election is historic and should be celebrated as such. His campaign was a testament to the power of restraint and reason at a time when citizens – in America and around the world – were weary of the arrogance, fear-mongering and labored hyperbole of the incumbent regime. Many voters, no doubt, saw in Mr. Obama deliverance from Mr. Bush who did more to undermine American interests at home and abroad than any foreign power or terrorist cell. In the aftermath of last week’s conclusive Democratic victory, America’s two-party political system is now in peril; thanks to Mr. Bush and his ghostly commissar, Vice President Dick Cheney, to say nothing of the creepy Sarah Palin and her anti-intellectual claque, the Republican Party – the party of Lincoln, the world’s oldest political movement – has been reduced to a gated community of aging, southern white people.

Voters were also impressed by the brilliance of the Obama campaign, which melded the internet with grass-roots intimacy to decisive effect. As the current administration consumed itself with its own incompetence, and as the field of candidates vying to replace it were felled by one gaffe after another, the flawlessness of the Obama bid became irresistible. As Mr. McCain graciously conceded on election night, his rival ran the superior race, and the voters decided appropriately. Presidential historians will no doubt study the Obama campaign the way military men dissect Wellington’s victory at Waterloo. (An imperfect analogy, actually, as Mr. McCain was no Bonaparte.)

And yet, in Mr. Obama’s triumph for the forces of light there was disturbingly dark subtext. Attempts by Mr. Obama’s enemies to identify him as a Muslim, though not so compelling as to derail his quest, were serious enough to keep him on the defensive. He was careful not to be photographed with Muslims anywhere, let alone in a mosque. His loyalty oath to Israel before the American-Israel Political Affairs Committee was as convincing a parody of a Beltway pol as was Tina Fey’s sendup of Sarah Palin, only without the laughs. During his tour of the Middle East, he kibbutzed heartily with Israelis but allocated a desultory 45 minutes with Palestinians. While touring the West Bank, he did not stand for photo opportunities nor did he give a press conference, pointedly shunning the very people who represent one half of a negotiated peace in that benighted region.

On the Republican side, a woman at a McCain rally told the candidate she could never vote for Mr. Obama because “he’s an Arab.” Mr. McCain’s response was an authentic, if unintentional measure of American Islamophobia.

“No,” Mr. McCain said. “He’s a decent family man.”

The editorial pages of America’s liberal heralds – the New York Times, the Washington Post, Newsweek – largely ignored Mr. McCain’s reply as well as Mr. Obama’s tactical snubbing of the country’s Muslim community. It took Colin Powell, America’s first black Secretary of State and apparently its sole statesman, to acknowledge the appalling bigotry of it all. His comments on CBS Television’s Meet the Press is worth quoting at length:

"I'm also troubled by, not what Senator McCain says, but what members of the [Republican] party say, and it is permitted to be said. Such things as 'Well you know that Mr. Obama is a Muslim.' Well the correct answer is 'He is not a Muslim, he's a Christian, he's always been a Christian.' But the really right answer is 'What if he is? Is there something wrong with being a Muslim in this country?' The answer is 'No. That's not America.' Is there something wrong with some 7-year old Muslim-American kid believing that he or she can be president? Yet I have heard senior members of my own party drop the suggestion he's a Muslim and he might be associated with terrorists. This is not the way we should be doing it in America.”

In politics there are always red lines. Mr. Obama can be forgiven for appeasing a largely anti-Muslim electorate while pandering to its Likudnik proxies, assuming he would sup with the devil today in exchange for a lasting and just Middle East peace tomorrow. But it says something about the character of a society where any serious attempt to relieve a long-suffering people would need to come calling the same way Mr. Obama’s forbearers did – through the back door.

The outcome of America’s 2008 presidential campaign was a welcome salve against two centuries of violent discrimination against black Americans. Yet however redemptive, it also sanctioned a new reality in the politics of ethnicity and religion: American Muslims, particularly Arab ones, are the new darkies.

Free Market Will Rise Phoenix-Like

The National 2008-10-20 22:48:15Exactly 21 years ago yesterday, the Dow Jones Industrial Average lost 22 per cent of its value in the biggest single-day stock market sell-off in US history. Black Monday, as it was quickly dubbed, ended a five-year bull run that was fuelled largely by leveraged buyouts, heavily margined public listings and exotic derivatives that defied the comprehension of most investors. Black Monday was a milestone in America’s twilight as a global power, or so argued the British academic Paul Kennedy in his book The Rise and Fall of Great Powers, which was published just in time for the crash. The US, Kennedy wrote, was falling prey to “imperial overstretch” and would soon be replaced by Japan as the world’s pre-eminent democratic leader. Economists praised Japan’s emphasis on savings and export-led growth, particularly as the US asphyxiated itself on debt. Zaibatsu, the country’s massive industrial conglomerates, and the trade barriers that insulated them, were considered the way of the future. Vertical integration and mercantilism were hot, outsourcing and open markets were passé. Ten years later, emerging markets were in crisis, having built their economies around the by-then repudiated Japanese model. It took a series of emergency bailout packages administered by the International Monetary Fund (IMF) – conditioned, of course, on the recipients’ embrace of neoliberalism as proselytised by the Clinton administration – to save the day. Free-market capitalism was back. Another decade, another wrenching role reversal. Having righted its books under Mr Clinton – owing in part to the collapse of the Soviet Union, which neither Kennedy nor the CIA anticipated – as well as some old-fashioned fiscal restraint, the US went on another borrowing bender. The reckoning that is now upon us has once again revealed “democratic” capitalism as a viral agent of financial ruin. President George W Bush’s “ownership society”, the notion that the cornerstone to civilisation is a home mortgage – preferably a fixed-rate one – is in tatters. The question is: what will take its place? Until now, the failure of one economic model always made way for something else. It was the scandalous consumption of the Gilded Age, for example, that transformed Marxism from an abstract theory into a worldwide movement. Only the speculative excess that led to the Great Depression could have turned a wanton speculator like Joseph Kennedy, the father of former president John F Kennedy, into a New Deal regulator as head of the newly established Securities and Exchange Commission. What is so conspicuous about the exhaustion of laissez-faire economics – this time, at least – is the lack of a viable alternative. A wholesale repeal of the Reagan-Thatcher revolution is unlikely. European leaders last week seemed genuinely reluctant to re-nationalise their economies after nearly three decades of privatisation and deregulation, however mixed the results. Japan remains a couch potato, having failed to make the transition from top-heavy, highly regulated industrialised economy to a more nimble service-based one. The abrupt drop in oil prices has shown how vulnerable massively subsidised petro-economies like Russia and Venezuela are to fickle commodities markets. The IMF, which was so prolific during the currency crises of the past decade, has been largely absent amid the current one, in which its most powerful shareholders are complicit. That leaves China. Given its sustained growth and rising income levels against unprecedented demand for jobs, capital and energy, China should rank as one of the best-managed economies in the past quarter century. Its foreign exchange reserves have swollen to nearly US$2 trillion (Dh7.3 trillion) at a time when the rest of the world, the US first and foremost, is starved of liquidity. Despite complaints from its trading partners, Beijing has methodically and deliberately opened much of its domestic market to foreign goods and services while lifting foreign exchange controls to encourage investment outflow. China is also authoritarian, corrupt, polluted and opportunistic, having partnered with odious regimes in exchange for access to petroleum and natural gas reserves. The Chinese Communist Party, like any political machine, is little more than a dispenser of patronage. It can persuade and coerce, but it cannot inspire. Having vaulted from destitution to prosperity in such a short period of time, the Chinese seem to have bypassed the euphoria that often accompanies economic modernity for a dreary, collective cynicism. As an example of fiscal prudence and restraint, the Chinese growth model has merit, but it comes at too high a cost. Democratic capitalism may have been consigned to yet another stint in history’s dustbin, but there is a reason why it keeps popping up for a fresh turn. The system that can more efficiently indulge our best and worst instincts – innovation, ambition, greed, recklessness – has yet to be invented. One way or another, the free market, with its duelling capacities to build and destroy, will reappear for another wild ride.

Death Notice

The National 2008-09-24 22:37:08GREED, of complications relating to over-leverage, under-regulation, and lax oversight, at its home in the Nether Reaches of Your Soul. Since the 16th century, when it played a key role in the Dutch tulip boom, Greed worked in tandem with alter-ego Fear as the driving force behind the global free-market system. (Asked for comment, Fear politely declined, citing a busy schedule that has it everywhere at once.) Greed was also complicit in the Long Depression of 1873, the Great Depression of 1929, the 1980s Black Monday stock market crash and Savings and Loan crisis, the imploded dot.com bubble in 2000, and most recently, the mortgage-backed security collapse. Much condemned throughout its life, Greed was rehabilitated during the Gilded Age as "good" by robber barons and railroad owners, and again in the 1980s by junk-bond traders, stock brokers, and investment bankers. But its prominence dimmed during the recent housing boom, when no one seemed to have noticed it at all. Greed is survived by its close relation, Rapacious Capitalism, cousin Irrational Exuberance, and siblings, the remaining five deadly sins: Lust, Sloth, Vanity, Pride, Wrath, and Envy. (Formerly a deadly sin, Gluttony was downgraded by the Bush administration as a healthy indulgence following the 9/11 terrorist attacks.) In lieu of flowers, friends of Greed requested donations be made to the Donald Trump Institute for Obscene Profits and Grooming Research.

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We are all Keynesians now. George W Bush, who came into office with a bang, is going out with one. (Though not the kind many of us feared; a US attack on Iran is about as likely now as a Christmas bonus would be for Lehman Brothers CEO Richard Fuld) The same US president who was swept into office on the shoulders of government hating conservatives is ending his blighted second term with an ironic flourish, presiding over the biggest corporate bailout since the Great Depression. At least Franklin Roosevelt's New Deal was new, a bold response to an unprecedented financial crisis; Bush's legacy - in addition to an unnecessary war, warrantless wire-tapping, the foundation of a garrison state - will be a warmed-over serving of that free-market scourge, moral hazard. An administration that has largely evaded accountability for its own misdeeds is now extending a $700 billion (Dh2.6 trillion) "get out of jail free" card to Wall Street. By shifting the obligations of polluted assets from private accounts to the public one, the administration is sending a clear signal: capitalism is a racket. Since 1990, after the Reagan administration repealed New Deal-era regulations on Wall Street, America's credit market debt has risen from $2.3tn to last year's $13tn, roughly the size of America's gross domestic product and more than a third larger than its national debt. (The bail-out fund announced over the weekend by Treasury Secretary Henry Paulson would raise the country's legal debt limit to $11.3tn.) The age of Reagan begat the independent investment bank, which cut its teeth on junk bonds - low-rated corporate debt that promised high yields to compensate for higher risk. The junk bond frenzy led to the Oct 1987 stock market collapse, which was a bump in the road towards the much more lucrative margins offered by the tech bubble of the Clinton 1990s. From mid-1999 to mid-2000, Wall Street racked up $77bn in revenue for underwriting the share listings of hundreds of start-up companies, too many of which had no earnings history to go with their dazzling, if half-baked business plans. The dot.com bubble went bust to the tune of an estimated $1tn. But Wall Street quickly recovered, leveraging a red-hot property market by turning doughty home mortgages into bundled assets that could be moved off the books of commercial banks as quickly as investment bankers could sell them. This cleared the way for more home sales, which bankers hungrily enabled by writing mortgages to anyone with a pulse. The Potemkin start-up of the last decade had become the indigent home owner of the next one, with predictable results: a crescendo of riches on Wall Street, followed by a harrowing crash . Only this time the concussion is having a truly global reach. Not for nothing has the measured Paulson urged foreign governments to set up their own bailout funds. So what's wrong with this? Nothing, assuming the "buy at your own risk" free market standard still applies. Instead, Washington indulges Wall Street with an implicit safety net after having abetted its crimes; when Federal Reserve chairman and arch monetarist Alan Greenspan flooded the markets with cheap money in response to the collapsed tech bubble, he restored market stability but fueled a national addiction to debt with record-low interest rates. Regulators, meanwhile, did nothing to discipline Wall Street after the dot.com denouement and refused to intervene as housing prices reached perilous levels, even after it was clear that bankers were jobbing home loans to people who obviously couldn't afford them. Free markets are sustainable so long as risk-takers are as liable for the punts that go wrong as they are for the ones they get right. The events of the last several weeks have exposed not the bankruptcy of capitalism but the severity and depths of its abuse.

Bernanke and Zhou Are Playing Two Different Ball Games

The National 2008-07-15 10:00:38From equidistant cities separated as much by politics and culture as by oceans and land masses, Ben Bernanke and Zhou Xiaochuan work opposite ends of a labyrinthian street. As the heads of the world’s two most influential central banks – the US Federal Reserve and the People’s Bank of China – they must navigate their way through a jungle of vertiginous risk and forbidding uncertainty. They have been attacked as either too cautious or too aggressive, too corporatist or too populist. Both men are haunted by inflation, and in a measure of the shifting global economy, Mr Zhou is having better luck slaying his dragons than the besieged Mr Bernanke. In many ways the world’s largest and fourth-largest economies are mirror images of each other – high-growth China as yin to a languishing American yang. In America, rising prices are a by-product of a weak dollar; Chinese inflation, meanwhile, is largely demand-driven, a consequence of higher wages due to a tightening labour pool and the worker-friendly demands of a new labour law. Since peaking at nearly nine per cent in February, its highest level in 11 years, the country’s consumer price index has retreated slightly due to the steady appreciation of the Chinese yuan. Although nothing in China happens without thorough and quiet deliberation by Communist Party cadres – Beijing’s cult of personality was buried with Mao – no one is more closely associated with the yuan’s rise than Mr Zhou. A 60-year-old economist who assumed the helm at the central bank in 2002, Mr Zhou is as colourful as Chinese commissars get; he has barnstormed the countryside to promote everything from outbound retail investment – tens of billions of dollars in Chinese savings have been invested in foreign markets in the past year – to a reining in of currency speculation. He has been criticised for being too “Westernised” by Beijing’s old guard and he has antagonised exporters, a powerful constituency, with his support for a strong currency. As late as last autumn, Mr Zhou’s strong yuan policy was considered radical, if not heretical. Today, it is applauded for being a cooling agent for an overheated economy, without hurting export growth; in the first quarter of this year the value of Chinese-made goods sold abroad grew by 11 per cent while the economy grew by just more than 10 per cent. Things have not turned out so well for Mr Bernanke, who had his defining moment just under a year ago. In August, having outraged Wall Street by refusing to lower interest rates in the face of weak demand, the Fed chairman reversed course only a few days later by cutting the rate at which the Fed lends money to commercial banks. The move was welcomed by investors but condemned by arch monetarists, who believe expanding the money supply is inherently inflationary. Further interest rate cuts followed, and persistent inflation together with slow growth has raised the spectre of 1970s-style stagflation. The 54-year-old Mr Bernanke, who replaced the legendary Alan Greenspan as the Fed chairman in February 2006, holds a PhD in economics from MIT and has co-authored a highly praised macro-economic textbook. As a professor of economics at Princeton in 2000, he identified illiquidity as the prime culprit behind the Great Depression. (Somewhat ominously, Mr Bernanke describes himself as “a Great Depression buff, the way some people are [American] Civil War buffs”.) His easy credit policies may be vindicated, just as Keynesianism is widely credited with having reversed the depression of the 1930s, along with the industrial mobilisation that followed America’s entry into the Second World War. This seems unlikely, however, though not necessarily because of policies inspired by Mr Bernanke. Unlike Mr Zhou, who operates in a hugely liquid economy, with US$1.4 trillion (Dh5.1 trillion) in foreign exchange and a vast ocean of unreported household savings, prolific manufacturers and $83bn in annual direct foreign investment, Mr Bernanke has few cards to play. He inherited from Mr Greenspan a highly leveraged economy entering the twilight of an asset bubble that burst just as he was settling into the job. Had he resisted pressure to lower credit rates, demand would have shrivelled further and the economy may well have entered a recession. It might still. Having bailed out Wall Street with emergency credit along with the $29bn rescue of Bear Stearns, Mr Bernanke now faces the possible collapse of America’s two state-sponsored mortgage financiers. Share prices are at 2000 levels, the outlook for the dollar is bleak and the age of cheap oil, the drug of choice for the American consumer, is no longer on offer. As the Bush administration enters its own twilight, America faces a raft of “least bad” options, from the economy to the war on Iraq. Historians may record this era of American power as “The Denouement”.

Arabian Trade Retraces the Silk Road

The National 2008-04-22 09:26:57Here in The New Rome, where nothing is news until the Washington Post says it is, few have noted the recent procession of Gulf leaders calling on their Chinese counterparts in Beijing. It is one thing to ignore diplomatic ritual halfway around the world, however, and quite another to overlook the Leviathan that inspires it: a half-trillion dollar commercial nexus that is transforming the global economy. According to the Dubai International Financial Centre, Sino-Middle East trade has doubled since 2000 to US$240 billion (Dh881bn) annually. A recent report from the management consultants, McKinsey & Co, estimates that Gulf investors will sink about US$250bn into Asia over the next few years, and most of that money will end up in China The spark behind this emerging growth engine is, of course, China's enormous appetite for energy and the Gulf's abundant supply of it. But unlike Chinese dealings in Africa and Latin America, mere reprisals of Victorian-era resource plundering, the Sino-Gulf relationship is both sophisticated and diversified. Gulf companies are building multi-use property developments in China and Chinese retailers are investing a fortune in Dubai shopping centres. Chinese companies are building cement factories and metro lines in the Middle East while Arabs are buying shares in Chinese banks. Investors on both sides are teaming up to launch equity funds, some of which are Sharia-compliant. The flurry of diplomatic exchanges between China and the Middle East retraces the old Silk Road and will only intensify along with the pace of Sino-Arab commerce. Consider Beijing-based Zhongon Construction, which is investing US$100m in Dubai property, or the retail giant Dalian Dashang Group, which has earmarked US$200m for the Gulf's retail sector. Last year, Saudi Prince Alwaleed bin Talal led a consortium of Arab investors for the purchase of a 20 per cent stake in China's largest bank, Industrial & Commercial Bank of China. In Bahrain, Ithmaar Bank is joining forces with a major Chinese lender to set up a US$100m investment fund. Meanwhile, the Kuwait Investment Authority has invested an undisclosed sum in Jade Alternative Investment Advisors, a fund of funds that manages equity stakes in Chinese firms. If there is a whiff of schadenfreude to this, the lucrative pairing of the world's most liquid economies amid a US credit crunch, well, bring it on. At the very least, America impelled the Chinese-Arab embrace by making itself such an inhospitable place to do business. In 2005, when the Chinese energy giant, CNOOC, was forced by nativist US politicians to withdraw its bid for California-based Unocal, it found welcome partners in the Gulf. A year later, when Dubai Ports World was driven out of the US market, it turned to China, where it now manages six container terminals. In response to America's prohibitively rigid visa requirements imposed since 9/11, a generation of Chinese and Arab students and businessmen are finding warmer receptions from Shanghai to Damascus. But in fact, the flourishing Sino-Arab trade is as much a salvation of the US economy as it is a challenge to it. A recent report from JPMorgan called Arab-Chinese commerce a "virtuous circle" of trade and investment that will moderate the global downturn. Economists tout Sino-Gulf collaboration as the most dramatic example of the "decoupling" of the global economy, as developing countries mature into a web of largely self-sustaining regional blocs. While this may be difficult for fin-de-siècle Washington to accept, the evolution of a multipolar global economy is both inevitable and desirable as a weak dollar and chronic US indebtedness erode America's share of global consumption. Nonetheless, official Washington will most likely address Sino-Arab convergence in the same way it responds to everything else it cannot control: with alarm. Already in this election year, Beijing's ties to "rogues" Syria and Iran are getting enhanced scrutiny while the Congress is calling for regulations that would inhibit sovereign wealth funds - the largest of which happen to be managed by China and Arab countries - from investing in US assets. It would be a perversely hostile reaction from a country that, by its addiction to debt over savings, has already auctioned away its economic destiny to foreign investors, a growing share of which are wearing the new version of the Silk Road into a well-travelled path.

The World's 'Engine of Growth' Stutters

The National 2008-04-15 15:12:26In the immediate aftermath of World War II, Dean Acheson, then-US secretary of state, declared famously – and with characteristic immodesty – that he was “present at the creation” of a new geopolitical order. It may not seem like it, given the cancer on Wall Street that threatens to morph worldwide, but we are on the crest of our own creationist moment, a tectonic inversion of the global marketplace. True, the near-term outlook is ominous. Some economists argue that the fallout from the subprime mortgage meltdown could cost the US economy trillions of dollars in vastly diminished home prices, household income and investments. Sustained dollar weakness will undermine the world’s largest market for manufactured goods and erode the value of foreign-exchange reserves. Shell-shocked foreign investors will be less inclined to buy US assets, including the sovereign debt that keeps Washington from insolvency. But the coming shakeout is long overdue. Only a secular re-pricing of the dollar can reconcile the contradiction of America – highly indebted with a personal savings rate of zero per cent – as the source of three-fifths of the world’s foreign exchange reserves. The positive legacy of the US credit crisis will be the end of the US as the world’s primary growth engine and the phasing out of the dollar as the world’s fiat currency in favor of a blend of major currencies. Already, central banks are adjusting or discarding altogether their dollar links or managed-float regimes. Kuwait presciently abandoned its peg to the dollar in May and pressure is mounting on other Gulf states – most dramatically in the UAE, where the weak dollar is fuelling labour unrest by eating into worker remittances – to untether their dirhams and dinars. In Asia too, creeping inflation has forced monetary authorities to shed the ballast of a weak dollar. Nowhere is that more clear than in China, where the yuan has appreciated by 15 per cent against the dollar since mid-2005 and is expected to rise further this year in response to that country’s highest inflation rate in 12 years. And as the yuan goes, so goes the Hong Kong dollar and its own rigid fix to its US counterpart. The weaker dollar is siphoning investment in emerging markets which have been showing clear signs of overheating. Over time, the strengthening of currencies in high-growth economies will emancipate their long-repressed consumers, the first step towards righting the global trade imbalances that stifle investment and stoke protectionist impulses among debtor states. The process has already begun in China, where currency deregulation has unleashed a torrent of retail investment in overseas stock markets. Poor timing, true, but the supremely risk-tolerant Chinese will pile back in once share prices stabilise. Personal consumption accounts for less than 40 per cent of China’s economy, compared with 70 per cent in the US, while its savings rate has actually grown since the 1990s, to a vertiginous 50 per cent of GDP. The unwinding of that massive reserve for the purchase of imported goods and foreign investment will have a sustained and seismic impact on global capital flows. And it will come about on China’s terms, not in response to pressure from a hectoring US Congress. Exchange rate flexibility will expedite the process, already underway, of weaning the developing world from the US as its primary consumer. Half of China’s exports are now destined for other emerging economies, for example, while South Korean exports to the US actually declined by 20 per cent in the year to February while its total exports rose by 20 per cent. Such “decoupling” as it is known, is neither a threat to globalisation nor insulation against a likely recession. It is, rather, the birth pangs of what could emerge as a more stable, multipolar global economy. The US, saddled with debt and the heavy toll of overindulgence, should welcome it.

Iraqi Economy (NPR - Talk of the Nation)

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