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Thesis & Antithesis

A critical perspective on energy, international politics & current affairs

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Location: Washington, D.C.

greekdefaultwatch@gmail.com Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.

31 July 2005

Oxy returns to Libya

On July 29, Occidental Petroleum Corporation (NYSE: Oxy) announced that it was resuming operations in Libya—operations that had been interrupted in 1986 when Ronald Reagan imposed comprehensive sanctions on Tripoli, banning American corporations from doing business in the country. According to the company’s press release, the resumption of operations in Libya will add about 12,000 to 15,000 bpd to the company’s production (in 2004, the company’s average worldwide production was 566,000 bpd). This change is unlikely to have an immediate effect on world markets, though Libya’s reintegration in global markets could prove significant. The Libya National Oil Corporation (which was exploiting Oxy’s wells in the country in the period since 1986) has 22.7bn barrels of oil in reserves (2003 est.), while the Oil and Gas Journal estimates Libya’s proven oil reserves at 39bn barrels; in 2004, daily production was estimated at 1.6m bpd (1).

At the same time, Libya remains, according to Wood Mackenzie Consultants, “highly unexplored” and has “excellent” potential for more oil discoveries. Libya’s own targets are set for 2m bpd in the 2008-2010 period and 3m bpd in 2015; to achieve that, Libya is seeking up to $30bn in foreign investment. For Libya, oil earnings form 95% of its hard currency earnings and 75% of government receipts ($18.1bn in 2004 from net oil export revenues), showing how important a healthy oil sector is for the country’s economy. Meanwhile, in June 2003, Colonel Qadhafi announced his plans to bring Libya to the WTO and appointed Shukri Muhammad Ghanem, a proponent of privatization, as Prime Minister; in October 2003, the prime minister published a list of 361 companies to be privatized (1).

It should be obvious that Libya is making serious efforts to rejoin the international community. The decision to accept responsibility for the Lockerbie bombing and its declaration that it has forgone pursuit of weapons of mass destruction are welcome developments. Add to that the resumption of operation by one of America’s main oil firms in the country, and the path to reintegration looks rosy. Which goes to show firstly how important it is for a country to make a strategic decision to rejoin the international community, and secondly how much it matters for the outside world to quickly step in and pick up the reconstruction pieces. It’s not far fetched to think that Libya is slowing proving a model of how a recalcitrant country can be reintegrated into the world.

References:
(1) “Country Analysis Briefs: Libya,” Energy Information Administration, Department of Energy, (link)

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30 July 2005

CAFTA passes, trade loses

On July 28, the US House passed the Central American Free Trade Agreement (CAFTA), by a vote of 217 to 215; all the same, this was the most depressing sign for world trade since the collapse of the Cancun talks in September 2003.

CAFTA is a marginal trade treaty: 80% of the goods coming from the CAFTA countries (Nicaragua, Costa Rica, El Salvador, Guatemala, Honduras and the Dominican Republic) enter America tariff free (under the Caribbean Basin Initiative). Even the import tariffs for American products have decreased from an average 45% in 1985 to about 7% (1).

At the same time, “a University of Michigan study found that [CAFTA] would increase U.S. gross domestic product by a modest 0.2 percent and boost Central America's by a substantial 4.4 percent” (2). And, as Mary Anastasia O’Grady, of the Wall Street Journal, wrote, “the treaty's main contribution to regional development is that it will help Centrals gain access to imports, thereby raising living standards and increasing the competitiveness of Central American economies” (3).

What is depressing is that politicians are unwilling or unable to discuss trade intelligently. Hence, the familiar arguments about the migration of industry, about job losses, about receding sovereignty, and about a ballooning trade deficit are rehashed in the press. Without being placed in a proper context, they give the popular impression that economic arguments are outdated—that because trade theory goes back a century and a half to David Ricardo, presumably the ideas are no longer valid.

This is silly; what is more, it is dangerous. As the Wall Street Journal reported, only 15 Democrats supported CAFTA, compared with 21 who gave President Bush fast-track authority in 2001, 112 who voted to grant China Most-Favored Nation status in 1997, and 102 who voted for NAFTA (4). It would be too much to suggest that Democrats have changed their minds because they are disillusioned with NAFTA (and they have little reason to be; ref. 5).

What is more likely is that the Democrats are unable to stand their own on trade; with Bill Clinton they exercised trade leadership, without him, they have yet to find a coherent stance. Which is the most depressing of all. One of the cornerstones of America’s liberal foreign policy has been the linkage between prosperity and peace. As America looks for security abroad, it needs to be reminded that the avenue to security often passes through prosperity. Losing a bipartisan consensus on trade can also undermine America’s interests at home and abroad. As the Washington Post noted,

“In the past few years … an attempt has been made to revive the political challenge once represented by Mr. Castro. It centers on Venezuela's Hugo Chavez, who combines Castroite rhetoric with the financial clout of Venezuelan oil. Mr. Chavez has spread his money around the region, sponsoring anti-American and anti-democratic movements and promoting alternatives to U.S. initiatives” (6).

In other words, there plenty of room here to avoid narrow partisan politics. A past column by Thomas Friedman comes to mind, one he wrote amidst the outsourcing mania last year:

“What am I saying here? That it's more important for young Indians to have jobs than Americans? Never. But I am saying that there is more to outsourcing than just economics. There's also geopolitics. It is inevitable in a networked world that our economy is going to shed certain low-wage, low-prestige jobs. To the extent that they go to places like India or Pakistan -- where they are viewed as high-wage, high prestige jobs -- we make not only a more prosperous world, but a safer world for our own 20-year-olds” (7).

There is always much more to trade than economics; which is why CAFTA might have passed, but the logic of trade has lost.

References:
(1) “Another Such Victory,” The Economist, 28 July 2005
(2) Sebastian Mallaby, “CAFTA deserves to pass,” Washington Post, 25 July 2005
(3) Mary Anastasia O’Grady, “Costa Rica's Tough Unions Make It a Cafta Holdout,” Wall Street Journal, 15 July 2005
(4) “Trading Places,” Wall Street Journal, 29 July 2005
(5) “CAFTA’s benefits,” Wall Street Journal, 27 July 2005
(6) “The Stakes in CAFTA,” Washington Post, 26 July 2005
(7) Thomas Friedman, “30 Little Turtles,” New York Times, 29 February 2005

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US energy nationalism?

This week, the US Senate passed a comprehensive energy bill (after four years of negotiations), while America also announced the formation of an “Asia-Pacific Partnership for Clean Development and Climate,” a non-binding agreement with Australia, India, China, South Korea and Japan to reduce the emission of greenhouse gases.

The energy bill is priced at approximately $17.6bn (1), and includes plenty incentives and tax credits for companies to pursue alternative energy sources. The Committee Chairman, Pete V. Domenici, commented that “using bonds and production tax credits, we provide a total of $4.1 billion in incentives to encourage the production of renewable energies. This tax package, like the authorizing package, is a green bill. It encourages conservation, efficiency and the use of clean and renewable energies” (1).

Meanwhile, around the globe, America resuscitated its commitment to curb global warming by agreeing to a partnership that could complement, but will most likely substitute, the Kyoto Protocol as a means of reducing emissions (at least for the nations concerned). The cornerstone of the agreement is that countries will set their own targets for emissions reductions, without an enforcement mechanism, and that the reductions will be achieved through the transnational transfer of technology.

Although welcomed in some circles as an agreement that brings together countries that Kyoto does not reach (America, Australia, China and India), elsewhere there was skepticism; the Worldwide Fund for Nature (WWF) said that, “a deal on climate change that doesn't limit pollution is the same as a peace plan that allows guns to be fired” (2).

Taken together, these two events signal America’s increased obsession with energy security and independence. The House version of the energy bill declared that it “decreases America’s dangerous dependence on foreign oil by increasing domestic oil and gas exploration and development on non-park federal lands and by authorizing expansion of the Strategic Petroleum Reserve’s (SPR) capacity to 1 billion barrels” (3). The Asia-Pacific Partnership, for its part, shows America’s uneasiness with relinquishing control of its energy (whatever that means) to foreign sources.

To be sure, the prima facie case for this skepticism is sound; religious fundamentalism in the Middle East, coupled with two oil shocks in the 1970s, have naturally made Americans suspicious of the link between trouble in the Middle East and their own energy supplies. And the skepticism for Kyoto is warranted because it is as close to a bad treaty as one could ever find—a good first step, but a bad treaty.

But America’s obsession with developing an indigenous energy supply goes beyond that. It was Richard Nixon who first called on Americans to rely on their own energy sources: “Let us set as our national goal that by the end of this decade [1970s] we will have developed the potential to meet our own energy needs without depending on any foreign sources” (4). And America’s knee-jerked objection to Kyoto is linked to the fear of setting any kind of limit on America’s emissions lest they tamper with America’s growth potential (as well as the absence of India and China from the deal), rather than a cost-analysis or scientific disagreement with the substance of the Treaty.

The follies of energy independence are too obvious to catalog in detail (5). And it will take time to judge whether the Asia-Pacific deal will be smokescreen or a substantive effort to curb emissions. But America’s energy nationalism will not do it good—the internationalization of energy markets is a prime guarantor of world peace and stability: countries that rely on open seas and stable politics to gain access to their energy sources are also countries that are inclined to defend the status quo.

In America’s case, this has been shown in the Gulf; today, as China looks for energy far from its shores, it behooves America to have a global partner who has a strong interest in preserving peace (in China’s case, it could also herald gradual change in places that the West has been unable to reach). In other words, as America fears the impact of terrorism to its energy supplies, that fear is also a good reason why America will be involved in distant places and provide some of the global public goods that form the basis of its leadership. Losing that would be too high a price to pay for an elusive energy autarky.

References:
(1) US Senate Committee on Energy and Natural Resources, Press Release, 27 July 2005, (link); two articles offer interest analyses of the bill; Gregg Easterbrook, “Votes Yes for the Energy Bill, Then Start Working on the Real Issues,” (link), and Jerry Taylor and Peter Van Doren, “Energy Bill Illusions,” (link)
(2) “US Agrees Climate Deal with Asia,” BBC News, 28 July 2005, (link)
(3) “Energy Policy Act of 2005 Highlights,” House Committee on Energy and Commerce, (link)
(4) Pietro S. Nivola, “Energy Independence or Interdependence?” Brookings Review, Spring 2002, (link)
(5) For a good read, Jerry Taylor, “No Matter What, Oil will Flow,” Los Angeles Times, 12 October 2001 and Pietro Nivola, ref. 4

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29 July 2005

Chinese diplomacy

Two moves by China this week underscore the dramatic effect that China’s diplomacy is having on the world stage; at the ASEAN meeting in Laos, the foreign ministers of the ASEAN countries announced the holding of an East Asian Summit in Kuala Lumpur, Malaysia in December 2005; meanwhile, on July 26, Robert Mugabe of Zimbabwe signed a deal in Beijing that probably gave China access to platinum and other minerals (the details were not made public).

The first of these, the East Asian Summit, heralds yet another Chinese move to set up structures that exclude America from the Pacific Rim. Earlier this month, the Shanghai Cooperation Organization, consisting of China, Russia, Kyrgyzstan, Uzbekistan, Tajikistan, and Kazakhstan, called for US forces to leave Central Asia, evidence of China’s agenda in meetings that do not include the US. As the Wall Street Journal commented,

“The stated long-term aim of the summits is the creation of an—as yet undefined— ‘East Asian Community.’ That’s a goal which offers Beijing an opportunity—especially in the absence of a U.S. presence—to try to fashion and dominate a new regional power axis, and sideline the trans-Pacific organizations in which America currently plays an important role” (1).

China’s long-term strategy no doubt includes the gradual expulsion of US power from East Asia and its replacement with China’s own sphere of influence. Dan Blumenthal, of the American Enterprise Institute, a Washington think-tank, catalogues China’s efforts in bringing this about in his testimony at the Senate Foreign Relations Committee (2), a speech worth reading. Suffice it to say that cultivating close relations with neighbors, and trying to establish the pre-eminence of their links to Beijing over Washington is integral to this strategy.

Which brings us to Zimbabwe. China’s agreement with Robert Mugabe is probably less strategically important than other deals Beijing has made and might even prove short lived; as Roger Bate, also of the American Enterprise Institute, writes, “China knows that Mugabe could fall from power any day and cannot assume that mineral rights deals done today will survive regime change” (3).

But this deal follows a pattern by Beijing of approaching those countries that the West has rejected. When Talisman Energy, a Canadian energy firm, was forced by activists to stop doing business in Sudan, the Chinese gladly picked up the tab; when Islam Karimov of Uzbekistan ordered a crackdown against protestors in the Andijan region (believed by opposition figures to have killed 745 people), he was censured in the Western press while “rewarded” by China with a $600m oil deal (4).

Myanmar, a country under Western sanctions for a decade and a half, has received “over $1.6 billion in military assistance and $200 million in economic assistance from the PRC [People’s Republic of China] in recent years” (2). Not only is Myanmar a possible supplier of gas (though it recently signed a deal for a gas pipeline to India through Bangladesh), but China perceives Myanmar as a possible overland alternative to the Malacca Straits (2); even more, China has a military surveillance station in the Burmese Coco Islands in the Indian Ocean (between the Bay of Bengal and the Andaman Sea).

In other words, China is acting as an alternative to Western power and increasingly tries to act as a substitute for it. As Robert Kaplan wrote, “China’s mixture of traditional authoritarianism and market economics has broad cultural appeal throughout Asia and other parts of the world. And because China is improving the material well-being of hundreds of millions of its citizens, the plight of its dissidents does not have quite the same market allure as did the plight of the Soviet Union’s Sakharovs and Sharanskys” (5).

China has yet to recognize the perils of propping up nasty regimes. For example, America’s bargain with Saudi Arabia (whereby the Kingdom’s security is roughly exchanged for Saudi intervention to stabilize the world oil market) has backfired, producing terrorists in one of America’s closest allies; The Economist thinks the same could happen with China’s support for Mr. Karimov: “Sooner or later, whether through revolutionary upheaval or the passage of time, Mr Karimov's rule will come to an end. When it does, Uzbeks will not remember China's support of the Andijan massacre kindly” (4).

Or, as the Wall Street Journal wrote, “By supporting states that brutalize their citizens and destabilizing their regions, China is protecting sources of political and economic instability” (6). This could undermine China’s own strategy; Holman Jenkins, Jr. notes, “China only makes itself that much more hostage to the maintenance of peace and a stable global trading system with its reliance on distant energy supplies” (7).

Nonetheless, the West needs a strategic re-think. America, in particular, cannot afford to pretend that it still occupies a unipolar world; its alliances with countries in Asia will need special care to be maintained; and its presumption that sanctions isolate countries from the fruits of the international community need to be updated—they merely substitute Western fruits for Chinese fruits, and the latter are less eager to judge the domestic policies of the tyrants the West is so eager to displace.

References:
(1) “China’s Power Play in Asia,” Wall Street Journal Asia, 29 July 2005
(2) Dan Blumenthal, “The Impact of China’s Economic Growth on North and Southeast Asia,” Senate Foreign Relations Committee Testimony, 22 July 2005, AEI website (link)
(3) Roger Bate, “Zimbabwe’s Robert Mugabe Sells Platinum Rights to Chinese in Effort to Cling to Power,” Daily Standard, 27 July 2005
(4) An oil deal between China National Petroleum Corporation and Uzbekneftegaz. “The dragon and the tyrant,” The Economist, 2 June 2005
(5) Robert Kaplan, “How we could fight China,” The Atlantic, June 2005
(6) “Mugabe’s Asian Ally,” Wall Street Journal, 28 July 2005
(7) Holman W. Jenkins, Jr., “China Joins the Club,” Wall Street Journal, 27 July 2005

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China revalues currency

On July 21, the People’s Bank of China announced that it would adjust its policy of pegging the Yuan to the dollar; the Yuan was revalued by 2.1%, whilst a 0.3% band would be maintained on either side. The governor of the central bank called it “an initial adjustment,” while there was also talk of moving towards a managed float, perhaps with a basket of currencies.

What is obvious is that this change will have little net effect on the balance of payment crises looming in the global economy—America’s twin deficits or China’s current account surplus, projected at 6% of GDP for 2005 (1). But the move is indicative of changes to come, changes that could have a significant impact on the global economy; however, it is those underlying changes, rather than any move in the exchange rate, that people should pay close attention to—particularly Beijing’s obsession with export-led growth.

To begin with, the revaluation shows that China bows to pressure—it hardly escaped Beijing’s attention that in April 2005, “67 Senators gave initial backing to a measure sponsored by senators Charles Schumer and Lindsey Graham that would impose a 27.5 per cent tariff on all Chinese imports unless Beijing revalued within six months” (2). But as Robert Samuelson of the Washington Post commented, “China apparently hopes that its revaluation will appease angry US congressmen and derail legislation that would impose steep tariffs on Chinese imports” (3).

All the same, the diplomacy of the US Treasury was eager to stress that it was in China’s interest to adjust the Yuan, rather than emphasize its importance in addressing America’s economic woes; “we wanted to try … patient and private diplomacy rather than an international battle,” said Tim Adams, former chief of staff to Treasury Secretary John Snow (2). This too was the tone of the People’s Daily, Beijing’s official party newspaper, whose headline read, “RMB exchange rate reform—decided out of China’s own need” (29 July 2005).

Following the revaluation, it is likely that the market pressures on the Yuan will increase as investors bet on a further revaluation, causing an influx of hot money into China (4). This is a prospect that China, like other developing economies, fears; in fact, Princeton economist Paul Krugman thinks that China ended up with the peg to protect itself from the 1997-1998 Asian financial crises and refused to meddle with the system after that because the economy was doing well (5). This a fear articulated by Zhou Xiaochuan, the central bank governor, in this (curious) metaphor:

“A fixed exchange rate is like a shield in the hand when fighting, however you attack me, I will remain unmoved; if I fail to hold on, the impact will cause influence. A floating exchange rate is like a foam-rubber cushion, if you want to fight your way in, I'll react softly, ok, you've come in, but I won't let you hit me; when you want to quit, I'll give you a pinch and let you go only after you have taken a layer of your skin off” (6).

At the same time, China might forgo some of the stabilizing benefits of a pegged exchange rate. China was essentially adopting America’s monetary policy: “China’s rate of inflation in its CPI [Consumer Price Index] has converged to that in the US, at a low level of about 2% a year” (7). Even more, its stable currency has accorded the predictability that encourages Foreign Direct Investment and has allowed other East Asian economies (save Japan) to maintain a relatively stable currency against the dollar (7). Even more, a steep rise in the value of the Yuan could undermine the Chinese economy, whose growth is primarily driven by exports, and which “some officials say requires a 7% growth rate to create enough jobs to maintain social stability” (2).

But the most important theme that emerges from the Yuan revaluation is the perversity that is the global economy. America’s current account and trade deficits mean trouble in the near future, while China’s economic policy also spells trouble; as Mr. Samuelson wrote, “The central problem of the exploding trade imbalances between China and the United … is the addiction of China, following the pattern set by Japan and other Asian countries, to export-led economic growth” (3).

China is engaged in a perverse economic policy. Essentially, China lends money to America so that American consumers can purchase Chinese goods (which also allows the American government to finance its own budget). This is caused by two economic realities—the low savings rate in America (about 2% of household income; ref. 8), and the high savings rate in China (40% GDP, 25% of household income; ref. 2).

This means that China’s currency policy is a substitute for a serious reform of its own banking and finance system—instead of investing this money in its domestic economy, it is lending money abroad. As Mr. Krugman noted, China “is devoting a lot of resources to the accumulation of basically useless pile of dollars instead of to higher living standards” (5). In other words, instead of lending money to its own people to buy goods, it is lending money to Americans; this adds to a long history of government failures in the region to stimulate domestic demand (9).

But China’s high savings rate indicates a more profound structural failure; China’s savings offer a huge pool of low-cost capital for investment. However, as the Financial Times notes, “it is invested inefficiently: to increase economic output by $1, China has to invest $5, a very high ratio by international standards. That is largely because its banks are still struggling to modernise and are plagued by corruption and fraud” (2).

Insofar as the move is a step towards correcting this absurdity, it should be welcomed; “Andy Rothman of CLSA, the Asian investment banking arm of Crédit Agricole, argues that Beijing probably views last week’s changes primarily as a useful step in learning how to manage a more flexible currency regime, rather than as a response to macroeconomic imperatives” (2).

Overall, this move is unlikely to have much an effect on America either because many will regard this change as too insignificant or because they will perceive it as evidence that China bows to pressure. But in this political talk of exchange rates, it is well worth remembering that exchange rates are merely numbers—numbers that capture essential truths about the relative value of economies; to focus on the exchange rate alone is to form economic policy that is both silly and wrong.

References:
(1) Morris Goldstein & Nicholas Lardy, “China’s Revaluation Shows Size Really Matters,” Financial Times, 22 July 2005
(2) Andrew Balls, et al, “The US diplomacy behind China’s revaluation,” Financial Times, 24 July 2005
(3) Robert J. Samuelson, “China’s devalued concession,” Washington Post, 26 July 2005
(4) “If the PBC allows only small appreciations (as with the 2% appreciation announced on July 21) with the threat of more appreciations to follow, then hot money inflows will accelerate. If China attempts further financial liberalization such as interest rate decontrol, open market interest rates in China will be forced toward zero as arbitrageurs bet on a higher future value of the RMB. China is already very close to falling into a zero-interest liquidity trap much like Japan's – the short-term interbank rate in Shanghai has fallen toward 1%. In a zero-interest liquidity trap, the PBC (like the Bank of Japan before it) would become helpless to combat deflationary pressure.” Ronald McKinnon, “Currency Wars,” Wall Street Journal, 29 July 2005
(5) Paul Krugman, “China Unpegs Itself,” New York Times, 22 July 2005
(6) “RMB exchange rate reform—decided out of China’s own need,” People’s Daily, 29 July 2005
(7) Ronald McKinnon, “Currency Wars,” Wall Street Journal, 29 July 2005
(8) “The Great Illusion: Survey of the World Economy,” The Economist, 30 September 2004
(9) “But Asia's efforts to stimulate stronger domestic growth have usually failed. Japan has been struggling to do so for nearly 20 years. South Korea recently encouraged the spread of credit cards -- and ended up causing massive consumer loan losses.” Ref. 3

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21 July 2005

New Age of Terror?

It is premature to generate a trend from two observations, yet the two attacks against London, on July 7 and 21, could herald something new in the terrorist strategy: instead of aiming at the psychological impact of horror, the terrorists have shifted to the psychological impact of fear. If true, this would be a significant change in the way the terrorists conduct their war.

On September 11, 2001 terrorism took a sharp turn. It’s not just that it hit America’s homeland, but also that it succeeded in killing so many people whilst destroying symbols of America’s power. It is clear that September 11 was the culmination of a series of attacks beginning with the 1993 World Trade Center attack, to the killings in Riyadh in 1995, to the bombings of the American embassies in Kenya and Tanzania in 1998, to the attack on the USS Cole in Yemen in October 2000.

But in the strategic logic of terror, September 11 was more change than continuity—it marked the breaking point and the recognition that the terrorist strategy thus far was not working. The reason for this was simple—militant Islamists have misread America; they mistook America’s withdrawal from Lebanon and Somalia, areas where America had peripheral interests (especially Somalia), as a general disinclination to fight. Kill a few more Americans, the terrorists thought, and America will run away.

The terrorists were wrong and hence had to adapt their strategy. September 11 was a product of this strategic recalibration; the new policy, as best we can gauge it, would be to wreck havoc in America in the hope that America would react in a way as to further the terrorists interests. The terrorists knew that, as Professor David Fromkin wrote, “[terrorism] achieves its goal not through its acts but through the responses to its acts.”

They terrorists expected an overreaction provoked by fear but mostly from horror—horror at the brutality of the terrorist attacks. It would be foolish to have expected an immediate American discussion about disengaging from the Middle East, though the terrorists probably hoped that this would come with time. The terrorists also counted that the initial sympathy for America would wane; they knew that when a superpower flexes its military muscles, people get uncomfortable; and that, as time diluted the memory of the terrorist attack, the initial support for America would subside.

But mostly they counted that America would strike back, and would strike back hard. This would mean two things: first, that the terrorist argument that Islam was under attack would ring truer to many young Muslims; and second, that America would be drawn into a prolonged war in the Middle East. Why was this desirable? Because if you can’t convince your enemy to retreat, you have to force him to it—and a long war, costing lots of money and with many deaths, is the surest way to force a country to change its mind.

Meanwhile, the terrorists didn’t abandon their initial strategy. While their first wager on America turned out to be wrong, they suspected that other countries would not show the same perseverance, particularly given the high level of public opposition to the war in Iraq. That’s how the Philippines withdrew their forces from Iraq, that’s how 3/11 in Madrid came about.

But it could be that this hybrid strategy is morphing into something new for dealing with the most persistent countries. For now, it seems that the longevity of the Western presence in Iraq will be determined by the situation in the ground, rather than terrorist attacks in the West. Hence, further attacks intended to provoke horror and another overreaction are unlikely—the Americans, in particular, are spread too thin for another military undertaking.

Which brings us to July 7 and July 21. As the West debates what skeleton force to leave behind in Iraq, the terrorists are adapting their strategy. This time they hope to generate fear—fear, in this case, to ride the tube to work. From this they hope that terrorism will be seen not as sporadic act of horror but as a daily fear—and hence something to be dealt with.

Of course, this is a gamble—living daily with terror can desensitize a country and make it less likely to comply with the terrorists’ demands. But the terrorists are taking their chances. To win they have to generate enough fear as to provoke the British and others to think hard about how to silence terror— the ultimate hope is that a country which is horrified will overreact, but a country which is afraid of a daily threat will approach it more rationally—and for the terrorists, that rationality would lead the West to rethink its entire engagement with the Middle East.

It is a long shot. But if the two attacks in London herald anything, they could mean that we have passed from the strategy of horror to the strategy of fear.

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India’s moment?

It bodes ill for a country that used to be the non-aligned state par excellence to be defined by its opposites—think about Indian economics and China comes to mind; think about Indian security and there stands Pakistan. On one hand, this highlights India’s challenge—how to stop seeing itself through the eyes of its neighbors and think about India as India and not as China or Pakistan’s rival. But on the other, it speaks to India’s promise: bridging the two non-Western centers for security, energy, and industry—the Middle East and Central Asia with East Asia—it has a vital geopolitical role. Its course will make a big difference for India, for Asia, and for the world.

What is staggering about India is that it is a democracy—the largest in the world too; it is also the world’s second most populous Muslim country (after Indonesia), its economy is growing at 6%, and though it is still a developing country with a large rural population (60%) and plenty of people below the poverty level (26%), its firms in IT and pharmaceuticals are industry pioneers. It is not hard to see, then, that there are many bets placed on India: how Muslims can interact with non-Muslims, whether developing countries can grow economically with democratic politics, how firms from poorer countries can jumpstart the productivity cycle, and many more.

DOMESTIC POLICY

India’s democratic politics are a source of pride, especially when contrasted with China’s authoritarianism. That India is a democracy also works well for its soft power—the idea of an English speaking democracy in South Asia excites many Westerners who find in that much that is familiar in a region where the unfamiliar reigns. Yet this foreign stereotype has created expectations and realities that have affected India’s course. India is an English speaking country that Westerns feel comfortable working with; but when foreign investors need to make money, they choose China over India, by a factor of ten to one (1). India’s English speaking status has translated into a lot of outsourcing of Western services to India, but the West continues to manufacture products in China (2).

The synthesis of foreign expectations with a strategic rivalry with China has led India to focus on industries such as pharmaceuticals and IT, where it has a clear advantage over China and where its success is bound to increase (3). But this is not a development strategy; there is good reason to think that India has understood globalization all too well, while forgetting the basic lessons of Economics 101. Living standards, any economist will tell you, come from two places: increased productivity and a reallocation of resources to more productive uses.

Instead, India seems caught into the rhetoric of globalization heard in Western circles—that survival depends on international competitiveness (4). Hence, India has firms that compete internationally, while it remains unable to make structural changes that really matter—to foster entrepreneurship, to transfer labor from agriculture to industry or services, and to move people out of poverty. And if there is any doubt about this failure, ask Atal Behari Vajpayee, the former prime minister whose Bharatiya Janata Party (BJP) lost the elections last year, a result interpreted by his failure to spread the fruits of economic growth.

At the same time, democratic politics often stand in the way of change. India faces a critical shortage of electric power—11% short of demand if you believe Manmohan Singh, the current prime minister (5). But local politics dictate that many farmers get electricity for free (as they do in Maharashtra), meaning that Indian companies have to pick up the tab in order to make electricity companies somewhat solvent. Even India’s privatization efforts seem driven by politics rather than economics, and are meant to fulfill a government promise to reduce the 5.4% fiscal deficit to a promised 4.8% (6). And inflexible labor laws also reflect political rather than economic needs; as Arvind Panagariya, a professor of Indian Political Economy at Columbia, wrote, “under a key law enacted in 1982, firms that employ 100 or more workers in India cannot fire them under any circumstances. This law has understandably deterred multinationals as well as large domestic firms from entering labor-intensive manufacturing” (7).

On the path to development, there is no need to think that democracy is an obstacle; but to be sure that it is not, India will have to acknowledge that democracy’s strength is that it offers a useful outlet for public discontent; hence, India is better equipped than, say, China to deal with a downturn in economic growth. Democracy can be productive when it includes people whilst not catering unconditionally to their whims. In other words, India needs to upgrade its technocracy and ensure that its political system remains democratic without turning into mob rule where unreasonable demands (such as that electric power has to be provided for free) will be catered to.

FOREIGN POLICY

Indian foreign policy just scored a huge diplomatic victory: it was finally recognized by the United States as nuclear power. In practical terms, this means that India will have access to civilian and military technology that it did not before (8). This forms a major strategic shift in America’s thinking; as George Friedman, of Strategic Forecasting Inc., writes,

“The United States, which until a few years ago regarded the Indian naval build-up—based on Soviet technology—as a threat to U.S. control of sea lanes in the Indian Ocean, has now completely reversed its posture. … This, by the way, has the Pakistanis worried. Islamabad clearly understands that its status as Washington's ally in the U.S.-jihadist war will go only so far in terms of duration and dividends for Pakistan. In other words, while India gets a long-term strategic relationship with the United States, Pakistan's relationship is viewed as short-term and tactical.

“U.S.-Indian collaboration began intensely shortly after 9/11. Part of it consisted of a mutual interest in manipulating Pakistan; part of it had broader implications. As the United States began to view the Muslim world as an unreliable and threatening entity, it started to see India in the same light as Israel. It was a potentially powerful ally that, in spite of its hostility to the Islamic world, or perhaps because of it, could be extremely useful” (9).

There is no doubt that India is privileged to be a democracy and an English speaking country, exuding a confidence in Americans that it can serve as a reliable ally in the region—an ally driven by more than a mere commonality of interests. But there is also no doubt that America’s thinking is very much driven by its increasing perception of China as a strategic rival instead of partner. India is fortunate that it’s economic rise has not provoked any backlash in America—last year’s frenzy over outsourcing can hardly be compared to the constant American popular demonizing of China for issues ranging from its currency peg (recently re-valued) to the bid by CNOOC for Unocal.

Geography dictates that India and China will be rivals; they have already warred with one another in 1962 over a border dispute. Their increasingly insatiable appetite for natural resources will translate into a scramble for accessing resources in Central Asia. India has already courted Iran, and is looking into getting gas from Myanmar and Turkmenistan (10); it also has longer term plans to build a pipeline through Pakistan to bring Iranian natural gas into Northern India. China too is looking for allies in the Central Asia region, hoping it can outmanoeuvre the Indians (and others) in pursuit of new energy sources.

Energy aside, India and China are likely to engage in a naval competition (11); the Straits of Malacca, between Malaysia and Indonesia, are one of the world’s most vital geo-economic routes—a quarter of the world’s maritime trade goes through there (12). They are also a prime target for terrorist attacks, which have been growing in the past few years. India and China’s ambitious are likely to include a long-term plan to secure their vital sea lines, including the Straits; what makes this worrisome is that the Straits lie at the natural boundary of the areas that India and China would aspire to control—the seas that surround the Straits are the Indian Ocean and Bay of Bengal on the one side, and the South China Sea on the other.

India’s strategic cooperation with America, thus, is a key development in the region, and in particular for China’s thinking—there is no worse feeling for a country, superpower or not, than to feel encircled. Looking around, China sees India, South Korea and Japan, and its sees America too. India, on the other hand, fears Pakistan and it fears China; this is likely to cause a zero sum mentality where both countries will perceive their neighbours as either with them or against them, spurring a diplomatic race to court them to their side before the other country does.

The likely geopolitical trend in the region, therefore, is an increasing energy and security competition between China and India—a competition that will likely spill over into what economic strategy works best for a country, what politics should developing countries have to grow and so on. From this competition, it is hard to know who will triumph, and it is harder still to predict whether the triumph will be settled in war. The only sure thing is that America will be watching from the sidelines and will be very pleased for the agreement that it made with India this week.

References:
(1) Arvind Panagariya, “A Passage to Prosperity,” Wall Street Journal, 14 July 2005
(2) “Whereas the share of industry in China’s GDP rose from a high level of 42% in 1990 to 51% in 2000, it remained virtually stagnant in India. By contrast, Indian service grew rapidly, expanding its share from 41% in 1990 to 48% in 2000. This trend has continued in the last five years,” quoted from Panagariya, “A Passage to Prosperity”
(3) “Ranbaxy, the largest Indian pharmaceutical firm, now derives nearly half of its business from America and, says Davinder Brar, its chief executive, it is on the prowl for acquisitions in France, Germany and Italy. One day last month, shares in Pfizer, an American giant, fell by 3% after an analyst's report drew attention to Ranbaxy's patent challenge to its anti-cholesterol drug, Lipitor.” “Patently Ambitious,” The Economist, 4 September 2003
(4) Paul Krugman’s “Competitiveness: A Dangerous Obsession,” from the March / April 1994 issue of Foreign Affairs remains the authoritative take on this idea.
(5) “Powerlessness,” The Economist, 2 June 2005
(6) “Selling minority stakes, [the Ministry of Disinvestment] notes, give the impression ‘that the main objective of the government is to obtain funds for reducing its fiscal deficit, and not to improve performance or governance’. Especially, it might have added, if the fiscal year ends on March 31st, an election is due on April 20th, and the offers for sale are bunched in an unprecedented splurge between February 20th and March 13th.” “Cashing in,” The Economist, 4 March 2004
(7) Arvind Panagariya, “A Passage to Prosperity,” Wall Street Journal, 14 July 2005
(8) “For example, India will be allowed to purchase Aegis technology, which is designed to protect naval vessels -- and battle groups -- from anti-ship missiles. So far, only Japan has acquired the technology, partly because of its cost. In addition, New Delhi will be able to purchase anti-submarine patrol aircraft.” George Friedman, “US-Indian Relations and the Geopolitical System,” Geopolitical Intelligence Report, Strategic Forecasting Inc, 20 July 2005
(9) George Friedman, “US-Indian Relations and the Geopolitical System,” Geopolitical Intelligence Report, Strategic Forecasting Inc, 20 July 2005
(10) “Aiyar’s Dream,” The Economist, 24 February 2005
(11) George Friedman believes otherwise; he writes, “A not-so-hidden issue at the summit in Washington was China. Sino-U.S. relations are deteriorating fairly rapidly. There was much speculation about India being an Asian counterweight to China. We have no idea what this means, since geographically China and India occupy two very different Asias. The United States doesn't need a nuclear counterweight to China, and China is very far from becoming a major naval power capable of projecting force outside of its regional waters. By that, we do not mean sailing into these waters, but fighting, winning battles and sailing home. The nuclear technology agreement that Singh obtained in Washington increases the likelihood that China is not going to project force west of Singapore. On the other hand, it was never likely to do so.” Friedman, “US-Indian Relations and the Geopolitical System,” Geopolitical Intelligence Report, Strategic Forecasting Inc, 20 July 2005
(12) “Going for the jugular,” The Economist, 10 June 2004

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19 July 2005

Changing perspectives (cont’d)

It was suggested to me that my last post was elitist and condescending towards America. It wasn’t meant to be. It wasn’t my intent to portray America’s eagerness as a flaw whilst praising Europe’s unwillingness to do so as a virtue. If America is impatient, Europe is unimpressionable (there, I have offended everyone).

Which is why I find so much hope in the Atlantic alliance; America has the youthful energy (to say nothing of the resources) to bring about change; it is a country that fought for decolonization and championed self-determination when it was unpopular to do; it welcomes change and is willing to experiment with it, domestically and internationally; it is willing to put its troops on the line to defend its national, and often by extension, the global interest. What Europe brings to the equation is stability—the stability of patience, of perseverance; of adhering to laws and process, of managing rather than quick-fixing disputes.

America and Europe have always viewed the world differently—at their core, Americans want a liberal international order founded upon values such as openness, democracy and capitalism; Europeans place a high premium on stability, compromise and law. For lack of better term, Americans are idealists and Europeans realists—Americans are dynamic and risk-taking, Europeans static and risk-averse. Americans regard values as the dominant building block of international politics, with laws codifying those ideals; Europeans hold law and sovereignty as values in themselves. As Robert Kagan wrote,

“The problem is that the modern liberal vision of progress in international affairs has always been bifocal. On the one hand, liberalism has entertained since the Enlightenment a vision of world peace based on an ever-strengthening international legal system. The success of such a system rests on the recognition that all nations, big or small, democratic or tyrannical, humane or barbarous, are equal sovereign entities. As Hugo Grotius, Hans Morgenthau, and many others have asked over the centuries, how would international law survive if states could violate one another’s sovereignty in the name of propagating democracy, human rights, or any other moral good?

On the other hand, modern liberalism cherishes the rights and liberties of the individual and defines progress as the greater protection of these rights and liberties across the globe. In the absence of a sudden global democratic and liberal transformation, that goal can be achieved only by compelling tyrannical or barbarous regimes to behave humanely, sometimes through force” (1).

Europeans find the former more appealing, Americans the latter. However, they trade places when it comes to tactics: Americans are realistic and understand that their vision might require force from time to time, while Europeans often disavow violence as a method for bringing about the order they so treasure.

All these differences are bound to produce antipathies: Americans view Europeans as cowards who will not accept responsibilities, while Europeans view Americans as zealots set out to impose their beliefs on the world. The result is that America exudes an idealistic dynamism with which Europe is and always has been uncomfortable, whilst Europe is tolerant of the status quo and has a higher threshold for action, military or otherwise, often dumbfounding America’s understanding of what foreign policy should be all about.

But what is important is how well Europe and America can complement one another: just as relationships between people need complementarily more than they need commonality, so do alliances among states. Can America and Europe do together what neither of them can do alone?

There is a long answer to this question; but the short answer was given by Dominique Moisi: “Europe is the best protection that the United States has against its inner evils: its isolationist narcissism, its ignorance of the way others feel and think … How, otherwise, will Americans achieve idealism without illusion, realism without cynicism?” (2)

References: (1) Robert Kagan, “America’s Crisis of Legitimacy,” Foreign Affairs, March 2004; (2) Dominique Moisi, “Reinventing the West,” Foreign Affairs, November 2003

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Changing perspectives

Recent entries have prompted friends to ask if my perspective in international affairs has changed at all over the past few years, and whether any of the change could be attributed to the fact that I have not lived in America for a while. One passage comes to mind when thinking about this; it is from Fouad Ajami’s The Dream Palace of the Arabs:

“Home comes and speaks in prose and exile in poetry, it has been said. Today in the Arab world—I left for America a day or two short of my eighteenth birthday, in 1963—I am a stranger, but no distance could wash me clean of that inheritance. In 1980, in an earlier book, The Arab Predicament, I was younger and approached my material more eager to judge. In my haste and my dissatisfaction with what the modern experience in the Arab world had brought forth, I did not appreciate what had gone into the edifice that Arabs had built. I grew more curious about that history in the intervening years and came to realize how little one really knows of the things that are all around us.”

This is a personal note that applies to Ajami and him alone; but I understand what he means and feel as if that same change—from judgment to curiosity—has found me as well, albeit in a more limited and narrow sense. My college years coincided with September 11 and wars in Afghanistan and Iraq; that aside, we are surrounded by problems that remain unsolved because the political will to solve them is lacking. Put otherwise, there is much in this world to be angry and judgmental about, and I often found that my eagerness to judge was a motivator in talking about foreign policy.

It is too much to say that this is no longer. But the urge to judge, to criticize, to correct has partly subsided. Some of this has to do with distance—a terrorist attack against the country you live in is bound to have a more personal effect on you (as it did when I lived in Boston on September 11) and Greece has not suffered an al-Qaeda attack, and no Greek soldiers are dying daily in remote lands; and the distance of time helps too—it allows the analytical and the historical to take over the emotional and the judgmental.

To be sure, the emotional and judgmental are just as important; after all, it is too much and too inhumane to expect someone who deals with issues of war and peace to remain unaffected by the brutality that human beings are capable of delivering upon one another.

But all this brings me to another thought, that a bit more heretical than anything written above: which is that American foreign policy often reminds me of that eagerness to judge—this rush to judgment, which comes from youth, comes from excitement, comes from anger—comes from impatience, and a desire to make the world perfect.

Americans believe both in the exceptionalism of the American experience and that the values they share are universally applicable and desirable. This often translates into a lack of imagination about the world, and it often fosters an impatience with those places that are less willing or able to adapt to the ways that Americans find rational.

I remember a friend comparing the foreign policy attitudes of Europeans and Americans; “both are simplistic,” she said; “your average European may sound naive—‘can’t we all live together in peace’, he will ask, while your average American will quip something like ‘let’s go get the bastards before they get us.’”

She preferred the former; I am still making up my mind.

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18 July 2005

Saddam on Trial

Today started the trial of Saddam Hussein. Instead of any thoughts about his trial, I will quote from a book I found in my library—it is a Middle East Watch book called Human Rights in Iraq, published in 1990.

- “One reliable report concerns a member of the ruling Baath party related to a former senior official, arrested in Baghdad in August [1987] after government informers reported that he had been present at a gathering where jokes were made about President Saddam Hussein. [The party member] was arrested for not informing the authorities, as were the male members of his family: three sons and a son-in-law. During interrogation they were subjected to torture … [A]ll five were subsequently executed and the family’s home was bulldozed.”

- “The evening television news begins with what Western diplomats in Baghdad call ‘the Saddam song,’ presented against a background of victorious soldiers and bursting fireworks by a smiling figure who chants:

Oh Saddam, our victorious;
Oh Saddam, our beloved;
You carry the nation’s dawn
between your eyes …
Oh Saddam, everything is good
with you …
Allah, Allah, we are happy;
Saddam lights our days …”

- “Ahmed Mattar, another Iraqi poet living in exile in London, wrote these lines in memory of a friend who died under torture in Iraq.

They imprisoned him
before they charged him
They tortured him
before they interrogated him
They stubbed out cigarettes in his eyes
and held up some pictures in front of him
Say whose faces are these
He said: I do not see
They cut off his lips
and demanded that he name
those “they” had recruited
He said nothing
and when they failed to make him talk
they hanged him.
A month later they cleared him
They realized the young man
was not the one they really wanted
but his brother…”

- “I looked around and saw 9 bodies out on the floor with him … but my son was in a chair form … that is a sitting form, not sleeping or stretched. He had blood all over him and his body was very eaten away and bleeding. I looked at the others stretched out on the floor alongside him … all burnt … I don’t know with what … another’s body carried the marks of a hot domestic iron all over his head to his feet … At the mortuary the bodies were on the floor … one of them had his chest cut lengthwise into three sections … from the neck to the bottom of the chest was slit with what must have been a knife and the flesh looked white and roasted as if cooked … Another had his legs axed with an axe … his arms were also axed. One of them had his eyes gouged out and his nose and ears cut off … One of them looked hanged … his neck was long … his tongue was hanging out and the fresh blood was oozing out of his mouth.”

- “Swawkat A. Akrawi, a consulting industrial chemist who graduated from Leeds University, managed to ‘smuggle’ a telephone call from a Baghdad hospital to a New Scientist contact. Speaking in Kurdish, he said: ‘The accident they arranged didn’t kill me, so they gave me thallium in the hospital where I am being treated. Say goodbye to everybody.’ The line was then cut off.”

- “At 6:00 am on August 25 [1988], eight planes flew over our village. All eight dropped weapons … When they dropped the bombs, a big sound did not come out—just a yellowish color and a kind of garlic smell. The people woke up, and some of them fainted. Those who poured water on themselves lived: those who could not reach the water died. I went to the river. Almost 50 women died. Some died who went to help their families. Seventy-five people died. My brother died … [And the son of Iskender Ahmad testified that:] Animals and children died. Blood came from their mouths and a yellow liquid from their mouths and noses. The noise did not sound ilke regular bombs. They would just drop and make a weak sound and them this cloud. Always expanding: a yellow cloud. Those who escaped managed to go into the water.”

Ziad al-Khasawneh, Saddam Hussein’s lawyer, is set on his defense: “Did anyone see him killing people? That is the problem!”

Roe v. Wade unisex?

Sandra Day O’Connor’s retirement has reignited the abortion debate in America, and to mark the occasion, here is a heterodox thought that has always floated in my mind: if a woman is allowed to terminate a pregnancy, why isn’t a man accorded the same right as well—not in being able to force a woman to have an abortion, but in being able to disavow the child, reneging all legal responsibilities to it? If conception occurs between a man and a woman, why should the woman alone have the right to terminate the offspring of that union?

I understand that there is little legal basis for this idea; the right to privacy, which features prominently in Roe v. Wade, hardly applies to men in this case. Even more, it is different for a man to discharge his duties to a child that lives, than a woman choosing to never give birth to a child. And, it is simplistic to argue for similar rights for men and women as if they bore an equal cost and responsibility in bringing the child to life.

But in the broader sense, I am not immediately convinced that men should not be entitled to that same right as women. (The heavy disclaimer-words are meant to suggest that this is not a position I endorse, just a radical “thinking out loud” that I would like to find the syllogism to disprove.)

16 July 2005

Nuclear Hermits

As America restarts negotiations with North Korea over its nuclear program, it should ask one question: how badly does North Korea want nuclear weapons? Any country’s appetite for nuclear weapons depends on their centrality in its grand strategy; and for North Korea, nuclear weapons might not be as important.

For America and the Soviet Union, nuclear weapons were integral to their global strategy—the claim to be a superpower wouldn’t be the same without them. China, France, and Britain needed a nuclear capability to avoid becoming second-tier powers. India could not assume the position dictated by geopolitics and demography and could never rival China without nuclear weapons; for its part, Pakistan could not claim to be India’s equal without nuclear weapons. Israel too understood that to remain a Middle Eastern country, a nuclear deterrent was necessary.

Even countries that did not develop nuclear weapons did so for the same reason. South Africa’s leadership in sub-Saharan Africa was unquestionable and having nuclear weapons was immaterial. Libya just decided that the isolation that would naturally result from pursuing nuclear weapons would hinder its ambitions in the Middle East and Africa. And it is Japan’s self-perception as a non-military power which keeps it from developing nuclear weapons.

North Korea’s enigmatic leadership and the country’s isolation make any guesses about North Korea just that—guesses. So here are some educated guesses about what North Korea knows.

First, North Korea knows that China will never let it collapse because it fears the consequences. Second, regardless of Pyongyang’s nuclear status, China will act as the ultimate deterrent for any American attack (save, perhaps, responding to a provocation by North Korea). Third, a war with South Korea and America cannot be won—all that North Korea can do is inflict damage. Last, East Asia is not a neighborhood where nuclear weapons can buy power and influence—Pyongyang cannot dominate East Asia in the way that, say, a nuclear Iran can dominate the Middle East.

These facts sketch an odd picture—North Korea’s nuclear weapons can neither serve as the regime’s survival mechanism nor can they promote any expansionist ambitions. To be sure, having nukes is probably better than not having them, but North Korea can protect itself better without them since its chief threat (an American invasion) is more likely to come if it has nukes than if it does not.

To this must be added the extreme ambiguity about the nature of North Korea’s programs. American policymakers are still unsure of what materials North Korea has purchased, nor are they sure whether the facilities they have detected to point the finger at North Korea can produce weapons grade, high-enrichment uranium (1). Given that North Korea has a “neither confirm, nor deny policy,” American policymakers will have to negotiate without full knowledge of Pyongyang’s programs.

At the same time, America needs to resist connecting the intelligence dots too creatively or pessimistically. As Selig S. Harrison noted, “The [Bush] administration’s underlying mistake—in the case of the North Korean uranium mystery, as in Iraq—has been treating a worse case scenario as revealed truth” (1). There is no doubt that Pyongyang’s expulsion of International Atomic Energy Agency (IAEA) inspectors on December 2002, and its withdrawal from the Nuclear Non-Proliferation Treaty (NPT) in January 2003 are discouraging and suspicious signs.

But it worth remembering that North Korea changed course only after America and its allies halted shipments of fuel oil, thus ending the 1994 Agreed Framework between America and North Korea (this came after North Korea was confronted with ambiguous intelligence about its program). And it is worth keeping in mind that this ambiguity is a source of strength for Kim Jong Il; in Iraq, the West perceived a hesitancy to allow inspections as an automatic admission of wrong doing, while the truth proved to be more complex.

As America restarts talks with North Korea it should remember that North Korea was not the only one who reneged on the 1994 agreement—the Korean Peninsula Energy Development Organisation (KEDO), charged with implementing the Western end of the 1994 deal, was consistently off target. The initial delivery date for the two light water reactors to be built in North Korea under the 1994 agreement was 2003, but the latest estimates, in May 2003, put the scheduled completion for December 2008 and December 2009 for the two reactors respectively (2). Additionally, the shipments of fuel oil were also consistently behind schedule (2).

It is important to admit that North Korea is not the only one to blame for the failed 1994 accord, primarily because from that admission comes an encouraging conclusion—that North Korea might be willing, under the right circumstances, to suspend its nuclear program.

But what are those circumstances? There is credence in the hypothesis that nuclear technology is North Korea’s comparative advantage—what it can produce relatively cheaply to earn what it wants abroad. In other words, nuclear weapons are a substitute economic strategy. In fact, Pyongyang has experimented with capitalism; starting in July 2002, North Korea undertook a series of liberalization measures that included the readjustment of some prices and wages, the devaluation of the won, the partial devolution of economic decision-making, and a limitation on some government subsidies (3). What is more, North Korea has been trying to create Special Economic Zones (SEZs) since 1991 (Rajin-Sonbong), while its latest zone in Kaesong is attracting investment and shows promise (though initially stifled by American opposition). Pyongyang’s obstacles to liberalization are primarily the lack of expertise, implying that nuclear weapons are substitutes for a market knowledge that it does not possess.

The broader image is that North Korea is a country that has turn inward out of fear. It does not have ambitions that would require it to possess nuclear weapons, and it knows that it can survive without them. North Korea is aware that its survival depends on its neighbors (especially China) and that this places limits to how provocative it can be with its nuclear program; and it also knows that trading nuclear technology for money is unsustainable because Pyongyang cannot count on an ever accommodating America. Although its isolation has been given an ideological bent in the philosophy of “Juche” (self-reliance), its experiments with SEZs support the hypothesis that North Korea might be willing to trade its nuclear program for food, money, energy, and security.

In the end, a successful negotiation strategy need not abandon its skepticism of Pyongyang; nor does it require that the West turn soft on North Korea. Giving up nuclear weapons would require that North Korea confront the internal logic and rationale of its own regime—that won’t come about easily. But in the underlying question of whether North Korea could ever surrender its weapons, the answer could be yes.

References: (1) Selig S. Harrison, “Did North Korea Cheat?” Foreign Affairs, January 2005; (2) “North Korea: A Phased Negotiation Strategy,” International Crisis Group, Asia Report No 61, 1 August 2003; (3) “North Korea: Can the Iron Fist Accept the Invisible Hand?” International Crisis Group, Asia Report No 96, 25 April 2005.

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15 July 2005

EU anti-terror measures

Responding to the events in London, the EU’s interior ministers agreed on a series measures to make Europe safer from terrorist attacks. The most conspicuous of their decisions decreed that EU companies should monitor phone conversations and internet traffic, though they also agreed to cooperate in stemming the recruitment of terrorists, to tackle terrorism finance, and to promote common standards for countries with IDs (1).

Although Europe does not share America’s hostility and skepticism towards government power, these laws are bound to have an effect on the European peoples and their perception of how their liberties are being curtailed in the fight against terror. But this conversation about how best to protect Europe from terrorism is doomed to be muddled, reflecting an overall confusion about terrorism’s motives and strategy.

To begin with, anti-terror measures, whether in America or Europe, contradict the spirit that Western leaders have proclaimed following every terrorist attack—namely, that “we won’t change our lives because of the terrorists.” This message treats terrorism as a criminal nuisance that can be contained. At the same time, the anti-terror measures indicate that, over time, Western societies will have to make fundamental adaptations to their way of life, settling in a perpetual state of neither war nor peace. Both views—of change and continuity—cannot coexist for too long without making apparent their inherent contradiction.

For many in the West, this seems like an admission of defeat; “changing our lives means that the terrorists win” is a typical mantra. It is doubtful whether this is the correct way to look at terrorism; it is counterintuitive that changing the way that Westerners live their lives is more important for the terrorists than altering the way they live their own lives. It is more likely that the terrorists use fear to induce political change abroad, not in the West; as David Fromkin wrote over thirty years ago,

“Whereas military and revolutionary actions aim at a physical result, terrorist actions aim at a psychological result. But even that psychological result is not the final goal. Terrorism is violence used in order to create fear; but it is aimed at creating fear in order that the fear, in turn, will lead somebody else—not the terrorist—to embark on some quite different program of action that will accomplish whatever it is that the terrorist really desires” (2).

In that sense, fundamentally changing Western societies is an intermediate goal; the ultimate hope, as best we can gauge it, is to disentangle Western foreign policy from Muslim lands. The generation of fear, then, is supposed either to cause Western governments to overreact (and hence to lose a war by overstretch), or turn inward and hence lose before they head to war.

Regardless of whether peoples in Western societies believe that terrorists are fighting them for who they are or what they do, there has to be an admission that Islamic terrorism is connected to Western policies in the Middle East (even in the most light version of this argument, one has to accept that the long standing support for regimes in Saudi Arabia and Egypt has created an airtight political space where extremism is bred).

Which brings us back to the anti-terror measures. A more complete appraisal of the war on terror would begin from asking whether Western societies extract enough benefits from the foreign policies they pursue that so enrage many Muslims. Although it is too crude to compare human lives with the price of oil, Western societies will, sooner or later, ask whether the price of foreign policy is worth the cost of terror. Even better, Western societies will ask whether they can extract the same (or similar) benefits in a way that minimizes the backlash that leads to terror.

It is within that cost-benefit nexus that the West can find the balance between security and civil liberty—to simply deny that there are fundamental tradeoffs in the way we live and in the way we conduct our foreign policies is only to delay the presentation of the bill.

References: (1) “EU agrees new security measures,” BBC News, http://news.bbc.co.uk/1/hi/uk_politics/4677241.stm; (2) David Fromkin, “The Strategy of Terrorism,” Foreign Affairs, July 1975

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08 July 2005

Imperialists abroad

It is easy for foreigners to be cynical about American tourists who are ignorant of foreign lands. But this apparent ignorance is caused less by a lack of knowledge on the part of the Americans as it is by an abundance of knowledge on behalf of the locals. Foreigners know much more about America than would be expected based on geography or history; they watch American films, consume American brands, and are affected by American politics in a proportion that is incomparable to their own influence on America.

It is therefore unreasonable to expect Americans to be too aware of the places they visit. All the same, there are times that Americans are “rightful” targets of cynicism, especially when their culture makes them unable to comprehend the world they travel in.

America is a diverse society held together by a common denominator: reason. It is the Enlightenment society, premised on the belief that rationality can bridge the gaps of history, ethnicity, and race. But little of the world is like that. The fixation with progress and perfection is hardly a global preoccupation; it becomes even less so when the means to achieve it are entirely rational. Societies have been hardened and tempered over time and are much tolerant of the imperfect, either because they have tried to be perfect and failed, or because they have tired of the efforts to be perfect. It is in places such as these, as Joseph Conrad suggests, that anything “merely rational fails.”

America is spreading an empire of reason over a world of unreason—where the passionate and the emotional have more currency than the reasonable and the rational, where progress is agonized over rather than welcomed with open arms. It is this incompatibility between the American experience and the world experience which poses as the hardest management problem for the American empire.

Reference: Robert Kaplan, “Conrad’s Nostromo and the Third World,” National Interest 51 (Spring 1998)

07 July 2005

London under attack

The world has lived with terrorism for too long. And we have become callous. In New York, about three thousand people died; in Madrid, 191. It is easy to think that killing 33 people (latest estimate & likely to increase) is hardly significant. (As the Economist wrote, “By the terrible calculus of terrorism, the attacks should thus be counted as a failure—a sign of weakness, not strength.”) But it isn’t right.

Two things are worth remembering about the attacks; first, they were meant to disrupt, not destroy. If sensation and fear are achieved through casualties, then surely, the attacks could be counted as failures. But the plotters targeted London’s transportation system—an artery for the city that many feared would sooner or later come under attack. This magnifies the impact of the attacks in a way that more deaths could not.

The second is that the attacks were meant to coincide with the opening of the G8 summit (that London just won the 2012 Olympics is merely a bonus, since the news came only yesterday). To begin with, the agenda of the summit (plus the Live 8 concerts) has already triggered widespread sympathy around the world; protests aside, this is the summit of hope. Secondly, this is a gathering of world leaders; whatever their differences, leaders from all over the world would express their solidarity with Tony Blair and the people of London—and they would have a common platform for doing so.

This much was clear before the attacks. What, then, can be made of the attacks?

For one, they were meant to outrage; “how can terrorists attack London on the day that world leaders gather to discuss Africa’s poverty?” was a sentiment that the terrorists knew they would trigger. This follows a pattern of trying to draw the West more heavily into conflict, and it rests on the assumption that the West cannot outlast al-Qaeda in battle. The terrorists to believe that the more the West is attacked, the harder it will attack back, until it has either radicalized everyone in the Middle East or has been engaged in so far reaching a conflict where external circumstances (a failing economy or the lack of popular support) will force it to retreat.

In that sense, generating sympathy for London and provoking outrage at the barbarity of the attacks (as Tony Blair put it) were both reasonable objectives for the terrorists, and were served well by the timing of the attacks.

As for the common expression of solidarity, it too can play into the terrorist hands. A terrorist attack generates sympathy, but it generates too much of it. As time passes and memory fades, the sympathy recedes, and the political differences between the leaders who expressed solidarity on the day of the attacks resurface. Given that Paris, Berlin, and Moscow have not come under al-Qaeda attack, these attacks reinforce the differences between those who would engage the terrorists more heavily (Bush & Blair) and those who wouldn’t (Chirac, Schroeder, Putin).

From a common platform would come uncommon sympathy; the terrorist bet is that once the sympathy pendulum swings back, it will reach further down the road of discord thus plunging the Western alliance in chaos.

It is too soon to tell whether the terrorists will turn out to be right. All we can do for now is mourn those 33 dead.

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Punditry

05 July 2005

CNOOC after Unocal

It is fitting that Sino-phobia has been given a new poster-child; after fuming about Chinese wages and the yuan’s peg to the dollar (both believed to cause all that is bad in America), American policymakers have turned their attention to Unocal, an energy firm, for which The China National Offshore Oil Corporation (CNOOC) has made a generous bid ($18.5 billion). What makes the mania seem credible is that CNOOC is partly owned by the Chinese government (70.6%); hence, the skeptics claim, Unocal will not be run commercially but will be forced to serve the interests of the Chinese government, threatening America’s ever-elusive “energy independence.”

To begin with, the Chinese bid is based on an increasing appetite for oil, and more importantly, on a growing demand for gas; as The Economist wrote, “CNOOC's state-owned, unlisted parent company—which still owns 70.6% of the listed CNOOC—is building up to ten giant liquefied-natural-gas terminals along China's east coast. All that it needs now is the gas. Three-quarters of Unocal's gas reserves (and a quarter of its oil) are in Asia (mostly Indonesia, Thailand and Bangladesh) and may be double previous estimates” (23 June 2005).

What is more, China’s desire to spend some of its dollars to buy a firm, rather than more American treasuries, is a sound financial move. America’s lax monetary policy is being exported to China, which is forced to pursue its own lax policy in order to maintain a fixed peg to the dollar; by investing in non-financial assets, the Chinese government is reducing its stock of US dollars, and therefore, can reduce the stock of yuan in circulation as well, thereby gaining more independent control of the money supply.

The Economist’s finance column, Buttonwood, writes, “The trouble is that if China makes a habit of snapping up vulnerable American companies, it might decide to buy fewer Treasuries—and that could cause trouble.” But this is not the only likelihood: seeing how US treasuries are less fungible than expected—since they cannot be safely used to, say, buy a company like Unocal—the Chinese might start desiring a higher price for their unending purchase of US bonds, thereby driving up their price.

The fear that the Chinese purchase could undermine America’s energy security is also questionable; if China satisfies its oil demands from Unocal, it will decrease its oil demands from elsewhere—the price of oil depends on the supply and demand for it, not on the commercial decisions of one firm about whom to sell to.

There is a political danger as well; one of the promises of liberal internationalism is that commercial relations between states can increase political cooperation and mitigate the forces that lead to war. But if China ceases to believe that it can satisfy its energy needs in the open market, it might have to resort to political means for getting the same results; surely it is better for China to buy Unocal than to form political alliances (as it has done in Sudan, for example) to secure its oil.

In one of the world’s most tight markets, where demand is far outpacing supply, the buying of Unocal by CNOOC is hardly a serious disruption; which is all the more reason to avoid a serious political row with China. It would be foolish to fight over a symbol, particularly when then the oil market is facing far more serious troubles.

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