Monday, November 26, 2007

(Mis)Understanding China

A Wall Street Journal editorial on November 26, 2007, complained of China’s refusal to allow the USS Kitty Hawk and its carrier battle group to dock in Hong Kong on Thanksgiving day. China relented a day later after the fleet was on its way to Japan. The Journal charged that China stole Thanksgiving family dinners from American sailors as 290 crew members of families had flown into Hong Kong to meet them.

On this action, the Journal proclaimed that China is not a reliable military partner. On what basis did the Journal believe that China was a reliable military partner? Is China to accede to every U.S. request or dictum, without the freedom to change its mind in response to U.S. actions such as selling military upgrades to Taiwan’s missile defense system?

The United States has its military, political, economic, and cultural interests around the world, with its military forces deployed in Korea, Japan, Germany, the Middle East, and elsewhere. China also has its interests, but to this point has deployed few military forces outside the homeland.

For the better part of four thousand years, China was the preeminent power in Asia. Compared with the West, it was much further advanced until the Industrial Revolution. From the Opium War in 1840 until the Communist armies seized control of the mainland in 1949, China suffered considerable harm and loss of dignity from several "unequal treaties" that gave Western nations control of China’s trade and extraterritorial rights in several trading ports. China has since fully recovered its sovereignty along with Hong Kong, and seeks to reunite Taiwan with the mainland. It is rapidly developing a modern economy and military. The country is beginning to flex its muscles, gradually but steadily, until it secures parity with the United States.

Secretary of the Treasury Hank Paulson, other U.S. government officials, and Members of Congress routinely advise China on what it must do and how it must behave on a host of issues, from the exchange rate of its currency to human rights. These suggestions are invariably rejected as China pursues its own course. China is no longer a land of coolies and compradors serving Western interests. How would the American government and people respond if China routinely advised the United States on what it must do and how it must behave? Hectoring China is likely to be increasingly unproductive as it gains in strength and influence.

It is natural that Americans would have a U.S.-centric view of the world, choosing to judge others on the basis of American values and interests. The same applies to China, perhaps more so, given that its civilization is over four thousand years old. American officials and journalists had better get used to an increasingly assertive China and give serious thought on how to manage the relationship between the U.S. and China. The Chinese will not take kindly to being lectured on their proper code of conduct.

Tuesday, November 20, 2007

Reconciliation in Iraq

Positive news is coming out of Iraq in the form of fewer U.S. military casualties and Iraqi civilian deaths and injuries. The explanation is that the surge in troops beginning last February has helped to curtail the destructive activities of Al-Quade, Sunni insurgents, and Shiite militias. The purpose of the surge is to stabilize Iraq and provide a more peaceful setting within which the Shiites, Sunnis, and Kurds can reconcile long-standing differences and form a unified government.

For Iraqis, the high price of oil is a godsend. Iraq exports some 2 million barrels of oil a day. At $90-100 a barrel, oil exports generate $1.4 billion a week, or $65-70 billion, a year in revenue. (It should be noted that U.S. military operations in Iraq are costing about $150 billion a year, an overhead of more than 200 percent.) This enormous flow of income, three times what it was when oil was priced at $30 a barrel, should provide an incentive for Iraqis to achieve some degree of reconciliation that would enable each community to share in this windfall. Perhaps the combination of the surge and money will achieve the U.S. mission in Iraq.

As of mid-November 2007, several U.S. generals have stated that despite the window of opportunity which the surge is providing, Iraqis have made little progress toward reconciliation. Key laws, especially the sharing of oil revenue, have not been passed. Neither greater security nor money seem to have overcome ancient enmity.

The Shiite-Sunni rift dates back fourteen centuries, grounded in the fight over who should lead the faithful after the prophet Mohammed’s death in 632 A.D. There are also important religious differences between the two sects. The Shiites were the losers in a struggle, resulting in their minority status throughout the Arab Muslim world. The Shiites have a history of subjugation at the hands of the Sunni, nowhere more so than in Iraq under the brutal regime of the late Saddam Hussein. Forgiving and forgetting is no easy task.

A dispute that is fourteen centuries old is unlikely to be resolved in a matter of years, much less the few months that the surge provides. A list of long-standing ethnic conflicts throughout the world suggests that the goal of national reconciliation in Iraq is too optimistic.

Catholics and Protestants in Northern Ireland were at each other’s throats from 1690 until a peaceful resolution, perhaps only temporary, was reached in May 2007, over three centuries later. Hutus and Tutsis in Rwanda and Burundi engaged in genocides that killed over a million people. North and South Sudan, now including Darfur, have been locked in civil war since independence. Other countries with ongoing ethnic conflicts or civil wars since they received independence include Sri Lanka, Congo, Guyana, Cyprus, Zanzibar, and Nigeria. Yugoslavia resolved its ethnic conflicts by dissolving into six different countries; one of those, Bosnia-Hercegovina, is itself separated into the Bosniak-Croat Federation and the Republic Srpska. Even peaceful Belgium is considering separating into two countries of Flemings and Walloons.

It is understandable that the United States desires the goal of a unified democratic Iraq, both as a buffer against Iran and as a model for other Arab states. A divided Iraq, either as three countries, a confederation (Swiss-style), or a federation could have difficulty retaining its autonomy. It is possible that Iraqi Shiites in the south would pursue close ties with fellow Shiites in Iran, that Turkey would resist an autonomous Kurdish region lest it inspire Kurds in Turkey to seek union with their fellow Kurds in northern Iraq, and that to resist the growth of Shia power, Sunni Arab states would intervene providing the minority Sunnis with financial and military support. But the goal of a unified democratic Iraq may be misplaced if it is impossible to achieve.

The Swiss Confederation has managed to survive two world wars and remain independent. It may be the only practical model for Iraq if the country is to retain any degree of unity. What would be needed is for the parties to agree to limit the authority of the central government and conclude a revenue sharing agreement that transfers most of the oil revenue to the separate communities. So long as U.S. policy focuses on national reconciliation, serious discussion of more viable alternatives is put on hold, perhaps when it will be too late.

Sunday, November 18, 2007

OPEC: The Cartel that Refuses to Break

In the midst of the first oil shock following the 1973 Israeli-Arab war, the late great economist Milton Friedman predicted that OPEC, the oil cartel, would ultimately collapse. His forecast was based on the historical failure of most cartels to hold together.

Here is Friedman's pronouncement in 1974 on the skyrocketing oil prices brought on by OPEC oil production cutbacks that began in October 1973: "The world crisis is now past its peak. The initial quadrupling of the price of crude oil after the Arabs cut output was a temporary response that has been working its own cure. Higher prices induced consumers to economize and other producers to step up output . . . In order to keep prices up, the Arabs would have to curtail their output to zero; they would not for long keep the world price of crude at $10 a barrel. Well before that point the cartel would collapse" (Newsweek, March 4, 1974).

Not only has the cartel held together for 33 years, it has become more influential than ever. OPEC is producing a gradually rising share of global oil output. It can count on a steady increase in demand for oil due to the need for energy imports in India and China, the latter modeling its industrializing strategy, in part, on the American experience with motor vehicles.

Oil-importing nations—Japan, the United States, most of Western Europe—want OPEC members to invest in new capacity to keep pace with rising demand, lest the price continue to rise. For its part, as a condition of investing in new capacity, OPEC wants a guarantee of secure demand for oil. What this means, in practice, is that oil- importing nations must promise not to invest too heavily in alternative energies, or take extreme measures against climate change, that would substantially reduce their imports of OPEC oil and reduce its price. This is a classic Catch-22 situation. If OPEC detects significant progress in the development of alternative energies among the oil-importing nations, it will act to keep supply tight and prices high. If, on the other hand, alternative energies are not developed, OPEC will continue to exercise a stranglehold on oil-importing economies.

OPEC meetings draw bevies of analysts and reporters, hoping to learn what its decisions will be on the price and quantity of oil. OPEC is enjoying the current high price, earning its members some $650 billion in 2006, a fivefold increase in a few short years. Saudi Arabia alone earned almost $200 billion.

This represents the beginning of a new world order, rising demand for oil and the ability of OPEC to control the supply and influence the price. In so doing, OPEC members will earn trillions of dollars in the coming years which it can use to step up its purchases of public debt and other assets of oil-importing countries. The "Golden Rule" states that "he who has the gold rules." Over time, OPEC members, many unfriendly to the United States, will gain power and influence over U.S. domestic and foreign policy.

To give but one example, OPEC is beginning to weigh a currency shift from dollars to euros, thereby reducing its exposure to a weakening dollar. Some OPEC members complain that the falling dollar is driving up inflation in their countries and reducing the purchasing power of their non-dollar imports. Such a shift would further weaken the dollar, restrict the ability of the Federal Reserve Board to lower interest rates less inflation accelerate to unacceptable levels. India recently announced that it will no longer accept dollars at its tourist attractions. Entrance fees must now be paid in rupees.

Thursday, November 15, 2007

Financing Our Enemies

Several prominent journalists, Thomas Friedman of the New York Times and Martin Wolf of the Financial Times, have chimed in on the theme of "financing our enemies." Every day the United States transfers over a billion dollars to oil-exporting nations. Among these are Russia, Venezuela, and Middle Eastern nations. Russia has rediscovered nationalism and patriotism stemming from its economic turnaround and accumulation of $400 billion in foreign currency reserves. It is becoming less cooperative with the United States and Europe on military and strategic issues. Venezuela is using its oil wealth to undercut U.S. interests throughout Latin America. Saudi Arabia, which the State Department terms a U.S. ally, has been and remains the principle source of funding for the extremist Wahabi, anti-Western rendition of Islam.

Friedman and Wolf, among others, increasingly talk of the economic and national security benefits of imposing a substantial tax on imported oil. The purposes are to reduce consumption thereby driving down the price of oil, encourage the manufacture of more fuel-efficient vehicles, guarantee producers of alternative sources of energy that there will be a floor under the price of oil, and use the revenue to reduce such other taxes as payroll taxes.

The proposal to levy a heavy tax on each barrel of imported oil has not yet gained much traction. Politicians and voters/consumers have very short-term horizons. Consumers will complain vigorously if gasoline costs $4-5 a gallon, and voters will select politicians who promise to reduce gasoline and heating oil prices. Thus far none of the major candidates has enunciated a national energy policy to reduce U.S. dependence on imported oil. Will it take another oil embargo or a dramatic disruption in supply to get the country's attention?

Wednesday, November 14, 2007

Revisiting Sovereignty

Dictionary definitions of sovereignty include "complete independence," "exclusivity of jurisdiction," "self-government," "a territory existing as an independent state," "an autonomous state," and perhaps most important, "freedom from external control." In democracies, self-government refers to the citizens of an independent state exercising their political rights to select their leaders though free and fair elections.

Freedom from external control, or undue external influence, enables a country to determine its own domestic and foreign policies. To what extent is the exercise of sovereignty under threat from the increasing pace of globalization? Does rising foreign ownership of U.S. assets limit the country’s ability to act in its national interest? Can the U.S. remain independent if foreigners own half of more of the country’s national debt, a large share of its banks and investment houses, and firms producing goods and services? Is there a tipping point when some degree of foreign ownership of a country’s productive and financial assets threatens its sovereignty? Few would raise this issue if the bulk of foreign owners were British, Scandinavian, or Canadian. It may be entirely different if they are Russian, Middle Eastern, or Latin American oil-exporting nations that are opposed to U.S. foreign policy or may be uncertain friends.

As the U.S. continues to import 12 million barrels of oil a day and transfer hundreds of billions of dollars a year abroad in excess of its foreign earnings, China, Russia, and oil exporting nations gain in power and influence.

Monday, November 5, 2007

Is Sovereignty Fully Compatible with Globalization?

Globalization is touted as an important factor in global growth, helping to uplift millions of people out of poverty in developing nations. Globalization is also touted as beneficial to the United States and other advanced economies. Moving production of goods and services offshore holds down costs, enabling American consumers to purchase a wide variety of goods and services at low prices.

But globalization is not all sweetness and honey. U.S. residents are voracious consumers. For many years, Americans have consumed more than they have produced. As a result, the U.S. economy has increasingly come to rely on foreign savings. Rising home values and other financial assets mean that Americans have more wealth than ever before, though the current slide in housing prices may correct that trend. If U.S. reliance on foreign saving and investment continues at the current pace, there is growing risk that U.S. sovereignty could be compromised as foreigners, many unfriendly to the U.S., own a larger share of the U.S. economy and accrue greater influence on U.S. foreign policy. To give but one example, four of the twenty-five largest bank holding companies in the U.S. were owned by foreign firms five years ago. That number has doubled to eight. China has become an increasing owner of U.S. government debt. New England’s residents receive subsidies in their home heating bills thanks to largess of Venezuela’s dictator, Hugo Chavez.

The dependence on foreign saving and investment is traceable to the current account deficit, foreign trade in good and services. The two principal culprits are America’s heavy dependence on imported oil and a massive trade imbalance with China. The current account deficit is in the neighborhood of $800 billion, which means that Americans transfer this sum to to oil-exporting nations and China. Sustained large trade deficits typically lead to weaker currencies. The dollar has fallen sharply in 2007 against almost all foreign currencies, those of both advanced and developing nations. Economic theory says that a weaker dollar, by raising the price of imports and lowering the price of exports, will gradually reduce the trade deficit. Exports have shown a marked rise as predicted, but high oil and commodity prices keep the trade imbalance from narrowing more than a few billion dollars. Another source of dollar weakness is interest rate cuts in the U.S. At some point, a weak dollar runs the risk of increasing inflation. The Federal Reserve Board will then have to raise interest rates, the exact opposite of current policy to prevent a meltdown in the credit markets. A return to the Catch-22 stagflation of the late 1970s and early 1980s is not inconceivable.

The steady transfer of America’s assets to foreign governments and state-owned enterprises amounts to gradual foreign socialization of the U.S. economy. This process can continue for many years to come without any noticeable decline in the American standard of living and conduct of U.S. foreign policy. But those who remember the oil embargo of 1973 in response to Israel’s victory in the Yom Kippur War, know that a great deal of damage can be done by those who curtail access to vital resources.
Promoting Democracy Abroad: Be Careful What You Wish For

President Pervez Musharaff’s declaration of martial law in Pakistan, suspension of the constitution, arrest of Supreme Court justices, and other anti-democratic measures are seen as a major setback for the Bush administration’s agenda of promoting democracy. Pakistan, a nuclear power and ally of the United States in the war on terror, is caught between the desire for democracy on the part of Pakistani moderates and the installation of a strict Muslim regime along the lines of the Taliban on the part of radical extremists.

In recent remarks at the Heritage Foundation, President Bush stated that the desire for liberty was written by the almighty into everyone’s heart. The mullahs and sheikhs that govern the Arab world believe that Allah wrote the truth into everyone’s heart. Islam is not a religion that permits its adherents to live as they wish, abandoning Islam for, say, Christianity.

Selling American values abroad to stem a tide of anti-U.S. sentiment is unlikely to achieve success in the Arab Muslim world. The main reason is that the separation of church and state in the Western world is not present in the Arab Muslim world. Lecturing Arab Muslims on the benefits of American values has exactly the opposite of its intended effect.

Speaking of democracy, President Vladimir Putin enjoys a popularity rating of 80% among the Russian people, far higher than any leader in the Western industrial democracies.
Water Water Nowhere and Nary a Drop to Drink

A town in Tennessee is out of water, period, and much of the state is threatened with water shortages. Atlanta faces severe water rationing due to an extended drought in the Southeast. How have public officials in these communities allowed these conditions to get out of hand? Why has investment in infrastructure and storage facilities failed to keep pace with rising population, bigger houses, more extensive landscaping, and other thirsty developments?
Body Count in Iraq

Recent news emanating from Iraq, namely, fewer U.S. and Iraqi casualties in October, have given Americans some measure of optimism that the surge may be having success, and that the U.S. mission of establishing a stable, democratic Iraq can succeed.

In this respect, it is instructive to examine the post-World War II process of decolonization. France and Britain generally required that rival ethnic, racial, linguistic, or tribal groups in their respective colonies form multi-ethnic governing coalitions as a precondition for independence. Many countries in Asia, Africa, and the Caribbean successfully achieved independence on the basis of a multi-ethnic coalition of moderate members of each major community, but, under the political pressure of ethnic extremists, collapsed into warring communities. Many newly independent countries—Guyana, Trinidad & Tobago, Malaysia, Sri Lanka, Northern Ireland, Cyprus, Rwanda, Zanzibar, Zimbabwe, Burundi, Lebanon, Congo, Nigeria, Sudan, and Yugoslavia, among others—suffered political instability, civil wars, dictators, coups, and loss of life and property.

How does Iraq fit into this paradigm? Kurds, Sunnis, and Shiites have been at each other’s throats for centuries. To complicate matters further, Turkey is concerned about the establishment of an autonomous Kurdish region in Iraq with oil, which might attract Kurds in Turkey to seek union with their Iraqi brethren. In the south, Iranian Shiites represent a potential alliance with fellow Iraqi Shiites. A temporary improvement in the body count is a poor predictor of the future prospect that a stable multi-ethnic central government can emerge and govern from Baghdad.