Deals are Good!

After endless, and sometimes seemingly hopeless, negotiations, diplomats have produced two new multi-national deals:  one to keep Greece in the Euro, and the second on nuclear development in Iran.

Despite enormous criticism and hand-wringing, both deals are good news for the  world.  The deal on Greece was vital.  The European Union remains the best hope for showing the world that nationalism can be overcome and that diverse peoples can coordinate their political and economic policies.  If there is ever to be global integration and government, the EU has to lead the way.  So showing that even when facing a crisis the EU can function to preserve unity is enormously valuable in itself.  What lesson would have been sent to Ukraine or Moldova, or to Turkey or even China, about dealing with the EU if the Union would turn on one of its own and expel them for failing to live up to certain economic standards?   The EU has always moved forward by accepting countries that did NOT meet its desired standards for democracy or economic stability (going back to Spain and Portugal) and urging them forward and helping them reach higher.

Moreover, as the US government found with Lehman Brothers, the consequences of allowing even a small piece of a deeply interconnected financial structure to fail can be enormous and much greater than expected.  Who knows for sure how the global financial system would have fared if Greek bankruptcy also brought down several German banks or caused a run on emerging market assets?  Better to preserve the system than risk a sudden change that, even if small, could be the proverbial straw that break’s the camel’s back.

Will the deal be ideal?  Of course not.  A sensible deal would include explicit debt relief and a plan to return Greece to economic growth that would restore prosperity.  It would include — as the current deal does to some degree — external oversight of Greek’s taxing and spending, which have been riddled with corruption, fraud, and waste.  And it would include continued engagement and flexibility to ensure a path to financial health is maintained.  In short it would work very much like US Chapter 11 bankruptcy plans, whose goal is not to punish companies that run into financial trouble and cannot meet their obligations, but to make the best use of remaining assets while lifting the burden of unpayable debts, and putting the company on a new path to growth.

The actual deal on Greece is not quite that sound.  It has no explicit debt relief (although creditors say they don’t expect to be fully repaid); the external oversight is concentrated on sales of states assets; and there is still a tendency to want to punish Greece for its financial sins, rather than prioritizing easing the suffering of the Greek people.  It will be up to the Greek leaders and European leaders to try to nudge the deal in this direction as it is implemented.  The U.S can play a role here, educating Europeans about its very successful and flexible bankruptcy programs, explaining why such programs are a good idea and how they work, and suggesting them as an alternative model to “punitive” actions for Greece.

The Iran nuclear deal is also good for the world, and even — despite the rhetoric of Israeli PM Benyamin Netanyahu — good for Israel.  Today, the world has an angry, isolated, and very nearly nuclear-armed Iran.  That Iran has been dangerous and untrustworthy and therefore was put under strong sanctions by the UN and US.  That is not a situation that can be maintained indefinitely.  Under the status quo, Iran will eventually get nuclear capabilities, and will be ever more angry and isolated when it does.  That is NOT a good outcome for Israel or the region or the world.

Under the new deal — although not all details are released yet — Iran will become less isolated as sanctions are ended.  In return, Iran will be forced to earn trust by limiting its stockpile of nuclear bomb-capable materials and opening its nuclear program to international inspections. The deal will change the  status quo by making Iran less isolated AND less likely to achieve nuclear weapons capability within the next decade.  That is a better outcome than the status quo.

Of course, the deal could still go badly wrong.  One of the first things needed immediately afterwards is to start negotiating Iran/Saudi cooperation against the Islamic State.  The Iran-Saudi enmity must be managed and reduced to limit hostilities in the region.  If the Shi’a-Sunni split continues to polarize the region, Iran will want to accelerate its conventional arms programs and its nuclear research so that when the deal lapses Iran can leap to become a nuclear power.  So it is vital that the next 10 years have conventional arms agreements and peacemaking to reduce Iran’s perceived security needs for nuclear arms.

Iran will not abandon its desire to be an influential great power.  But that can be useful as a counter-balance to Russia in the Middle East (one of America’s original reasons to ally with the  Shah of Iran decades ago).   And since the goal of sanctions relief is to rebuild Iran’s economy, and a major war will return it to isolation and undermine that economy, we can hope that Iran can be induced to undertake a peace-maker’s role in the region, rather than a trouble-maker’s role, once the deal is concluded.

Again, continued work by diplomats on implementing the deal, to ensure it meets its goals, is vital.  We cannot pat ourselves and our colleagues on the back and walk away.  The deal is a starting point for improving security and peace in the Middle East, just a starting point, and needs vigorous follow-through.  Yet it is a vital starting point and improves the odds for better outcomes in the next few years.

Both these deals are far better than no deals would have been.  And they give hope at a time when the world needs so many  additional deals — for peace among nations in the South China sea; for cooperation on global climate change; for refugees and asylum-seekers in Europe; on Cyprus; on South Sudan;  on Afghanistan to name just a few.

The diplomats and leaders have now taken the first step in doing their jobs.  Let us hope they follow through to make sure that the  potential benefits of these deals, so hard-won, are realized.

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China + Russia = Anxiety?

I have spent the last few weeks in the UK, Russia, and Hong Kong.   The UK was very standard British — gloomy grey skies and damp  air, wretched coffee (for the most part, better to stick with tea), and a wonderful hodge-podge of people and ideas.  The place is clearly open to the world for migration, business, scholarship, and fun.  And the people are enjoying it.  They gave an unexpectedly solid vote of confidence to Tory leader David Cameron, whose party won a clear majority in Britain’s parliament.

In Russia, skies were also mostly grey and gloomy.  St. Petersburg is a beautiful city, and it was clean and inordinately patrolled by security for President Putin’s St. Petersburg International Economic Forum.  But the mood was a bit gloomy as well.  Putin gave a bravura performance when interviewed by American TV host Charlie Rose.  “Why is Russia being so aggressive,” Rose asked?   “Who, us?”  replied Putin.   “NATO has expanded into the Baltic States, Eastern Europe, and southeast Europe, and you say we are being aggressive? ”

“Doesn’t Russia have an obsession with being respected?” Rose asked.   “Can you show me a large historic nation that does not want to be respected?”  was the reply.   “Do you think we or any nation should want to be humiliated?”   And one last question:  “Are Russia and China working together to form an alliance against the West?”  “That is a silly question,” replied Putin.  “China and Russia are working together to further their own internal goals of economic growth and development.  We have common interests.  There is no alliance against anyone; we are cooperation for ourselves.”

In his prepared remarks, President Putin gave a detailed accounting of Russia’s economic progress despite falling oil prices and international sanctions, down to the pounds of chicken produced by Russia’s farms.  Things are not nearly so bad as feared, and next year will be better.  No mention of any war or conflict on Russia’s borders, or of any need for economic reforms.

Yet the parade of foreign leaders on display hinted that something was amiss.  It was kind of a rogues’ party of regimes on the outs with the west: leaders from China, Myanmar, and Greece joined Putin on the main stage.  No signs that Russia was open to the world, or open to change.  It seems “Stay calm and carry on,” that slogan posted on mugs and walls all over the UK, should in fact be on display in Russia instead.

Hong Kong, as usual, is buzzing with life.  For a few days, it was clouded by rain, but then the blue skies appeared, the sun shone, and the beauty of the city soared above our heads once more.  Dizzying skyscrapers in amazing abundance, brilliant green mountain peaks, and ships, cars, beaches, and people all side by side.   The air was exceptionally clear (as measured by the Hong Kong University of Technology pollution spotter as well as the wonderful visibility) and the temperatures balmy.

Things heated up in the HK Legislative Council as well.  The Democratic Alliance for the Betterment and Progress of Hong Kong — which is the pro-Beijing party in the legislature — and the rest of the establishment bungled their effort to stop the pan-democrats from blocking Beijing’s voting plan from being accepted.  The pan-democrats wanted to block the plan because it gave Beijing and its supporters the ability to restrict who could be a candidate for chief executive, even though all candidates would have to face a popular election to contest for the office.  The pan-democrats, although a minority, still had the votes to block the plan, which required a two-thirds majority to pass.  But the vote was 28-8 against the plan, because several dozen pro-Beijing legislators mistakenly walked out just before the vote believing they had called a recess.  Oops!  The vote went on without them, and the measure was voted down by a quorum to a clear defeat.

This comedy of errors has left everyone wondering what comes next; but the streets remain calm and it is the pro-Beijing legislators who look the fools.

In China, however, they are not laughing.  The mood is gloomy there, I am told, with ever-greater restrictions on internet access, on international travel, and research.  Is this a temporary consequence of anxiety about the government’s crackdown on corruption, which has left everyone uneasy?  Or a permanent shift toward fear and paranoia about all foreign influences?

It is too early to tell.  But at the moment, both Russia and China are becoming more closed societies.  If they are so confident in their systems, and so optimistic about their future, why this extreme fear of foreign influences?  I fear that Russia, which sees only enemies to its West, and China, which is seeing mainly enemies to its East (Japan and the U.S.), are reinforcing each other’s anxieties.

Let us hope the Sino-American dialogue can at least calm some of China’s fears, and that the Pacific trade agreement and the Chinese infrastructure bank can overcome those anxieties and emphasize cooperation among nations.  Something needs to tilt the balance in that direction; otherwise the gloom will get deeper still.

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Russia’s Future — China or Europe?

I am back in Russia this week, and enjoying it.  Yet while the weather is beautiful, the people equally so, and the ruble holding steady, there is a sense of malaise in the air.  The conflict in Ukraine is clearly on hold, not solved, and this week another new law was passed aiming to stop Russians from cooperating with any foreign-supported organization that might threaten the Russian government’s stranglehold on information and political organization.

New figures also indicate a decline in fertility and increase in mortality, confirming–as my research team wrote in the Appendix to its report on Russia’s demographic future — that the hopeful situation for Russia’s population that appeared just in the last few years has now faded away, returning Russia to a long-term fate of sharp population decline.

How will Russia escape these problems?  There is talk of Russia turning East, and relying on deals with China to strengthen its hand.  Yet I do not believe that will work.

Rejecting Western notions of multi-party democracy and separation of powers, both Russian and China have leaders who believe that strong individual leadership and centralized authority, with no role for an active organized opposition, is essential to preserving stability and reaching their goals.  So it seems natural that China and Russia should become close partners.  With similar visions, couldn’t each help the other achieve their goals?  The recent deal between China and Russia for long-term supply of natural gas to China seemed to mark a new era of cooperation between the two nations.  With visions of a new trans-Siberian high-speed cargo line that would allow Russia to serve as a major transit line between China and Europe, the opening up of Arctic sea lanes that would provide another global east-west link, and cooperation on a host of international issues, from containing Iran’s nuclear ambitions to fighting Islamic terrorism, Russia-Chinese cooperation would seem to have entered its strongest phase since the Sino-Soviet split.

Yet in fact, these appearances are deceiving.  The cooperation between Russia and China is extremely one-sided, benefitting China but offering little to Russia in return.  All the leverage is on China’s side, and indeed China looks set to get stronger while Russia grows weaker.  For Russia to place its bets on a Chinese alliance is extremely ill-advised, for helping China to achieve its dreams may produce nightmares for Russia.

Unequal starting positions

Russia would like to return to its days of being a superpower, or at least being a major power in a multi-polar world, regarded as an equal of Europe, China, and the United States.   No doubt Russia is their equal in its contributions to world music, science, and literature.  But if one looks at demographic and economic relationships, it appears that Russia is out of its league.

Russia today has returned to population growth, driven by improvements in fertility and mortality.  It’s population today, including that of Crimea, is almost 145 million.  Yet this good fortune likely will not last.  Fertility was boosted by prosperity and generous government programs; with oil prices depressed and Western sanctions limiting economic growth, fertility is likely to stabilize or decline.  Given that the women now coming into their prime child-bearing years are those of the exceptionally small cohort born in the post-Soviet crises years of the early 1990s, birth rates are certain to fall.  At the same time, economic distress and looser rules on sales of alcohol will likely see mortality rise again.  The fall in value of the ruble has also made working in Russia less attractive to labor migrants.  Putting all of these trends together, Russia’s population is likely to decline again in the coming decades, falling to perhaps 130 million by 2030.

To the west of this modest sized Russia (about the same in population as Mexico or Japan today) would be a European Union with 465 million inhabitants, and to the east, China with 1.4 billion people.   Thus the European Union and China will likely, by mid-century, have fourteen times the population of Russia.   In terms of their economic output, according to the International Monetary Fund the Gross National Product of the EU today is $18.5 trillion dollars, adjusting for purchasing power (PPP).  That of China is $17.6 trillion.  Together, they have economic output of $36.1 trillion, or ten times the economic output of the Russian Federation ($3.56 trillion).  Since China, even if its growth slows to 5% per year from its present 7%, is likely to continue to growth more rapidly than Russia, by 2030 it seem likely that the combined economic output of the EU and China will also be twelve to fourteen times as large as that of Russia.

In short, Russia is facing overwhelming odds in trying to position itself as a third ‘polar power’ in Eurasia between Europe and China.    It is as if Japan tried to be a third major co-equal power in the Pacific between China and the U.S.   It is simply unsustainable.  More likely Russia will be squeezed between the much larger and economically mightier regions of the European Union and China.

Different conditions, different approaches

One can see the difference in strategic positions in the differences between the approaches being taken by China and Russia on the world stage.  China is firm in expressing its territorial ambitions, especially in the South China Sea, but has so far avoided any overt conflicts.  Instead, it has tried to win influence over its neighbors by offering investments, trade agreements, and institutions.  It has embarked on a massive campaign against government corruption, and signed an important agreement on climate-change gases with the United States.

By contrast, Russia has found itself engaged in wars across its borders, first in Georgia and now in Ukraine, that have cost it international goodwill and millions of rubles but have brought few benefits.  Russia has little in the way of investments to offer other nations; instead it is struggling to limit capital flight to save investment capital at home.   Instead of agreements to broaden its trade, it has responded to Western sanctions by further restricting imports.  Instead of cracking down on corruption and supporting international efforts on climate change, Russian business and government corruption remains largely immune to requirements for transparency and probity.  And while the U.S. and China area assuming leading roles dealing with global climate change, Russia sits on the sidelines, its government and economy still heavily dependent on the sales of fossil fuels to countries that are in fact doing all they can to cut back on their use.

These differences reflect a simple truth:  China is able to approach its dealings with the world from a position of strength; while Russia is dealing from a position of weakness.

Where does Russia’s future strength lie?

The Russian Federation will not be able to act independently as a third major power on the Eurasian continent – its population and economy are far too small, and its dependence on natural resource sales and unchecked corruption render it more and more like an under-developed nation, rather than a modern scientific and industrial one.  If Russia becomes mainly a natural resource supplier and transit hub for China’s massive economy, Russia will be ever more dependent on the ups and downs of China, and the whims of its leadership.  Down this path lies loss, rather than gain, of Russia’s autonomy and security.

So where can Russia turn to restore its strength?  Oddly enough, the logical answer is to Europe.   Together, Europe and Russia would be a reasonable counter-weight to China in both population and economic might.  Europe and Russia working together would span the entire Eurasian continent, and like the United States would be both an Atlantic and Pacific power.  Russian are, despite their proud and independent culture, mainly Europeans – Russian art, culture, literature, and religion are solidly within the European family, respected and admired for their contributions to Europe as a whole.

Yet instead of taking its natural place as one of the leading powers within Europe, Russia has essentially gone to war with Europe over the issue of allegiance and influence in Ukraine.  This conflict over a small and economically modest nation (Ukraine’s economy is smaller than that of Peru or Romania, at $370 billion PPP-adjusted) has moved Russia further away from full engagement with the $18 trillion dollar economy on its doorstep, that of the European Union.  Of course, Russia’s long association with Ukraine and feelings of kinship have led to Russia’s military engagement there.  But in the long run, this conflict, like that in Georgia, simply moves Russia further away from the logical position in which it would have its greatest economic and political strength, and that is through closer engagement with Europe, not conflict and separation.

If Russia is to win the respect and admiration of the world, it needs to return its economy to growth, reduce its dependence on natural resource exports, limit corruption and open its economy to greater competition.   Selling ever more raw materials to an ever-more-dominant Chinese economy will not achieve those goals.  Instead, internal reforms, making peace in troubled regions, and seeking to take advantage of opening and further engaging with Europe are the ways that Russia can restore its strength.

The world has changed, and the Russian Federation will never play as dominant a role in global affairs as did the Soviet Union in the 1950s and 1960s.  Yet at the same time, the Russian people should never again suffer from conflicts as they did in the Second World War.  Moreover, with the advance of Russian technology and skills, the Russian people have every reason to expect that even in a smaller Russian state, they will achieve new heights of prosperity and security.   France and Britain are no longer superpowers, and Switzerland never was one (except in watches), but the quality of life their people enjoy today is something that Russians would gladly enjoy as well.

Russia’s strongest future is not to be an isolated nation, but to enjoy its status as one of the largest and most powerful countries within Europe.  To fully realize that future, however, Russia will have to shift back to a course of engagement and friendship with Europe.  The sooner that takes place, the better for Russia and its people.

 

 

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Here we go again, slower slower and sloooowwww

One month ago, I took time out from commenting on foreign affairs to note that the world economy, and the U.S. in particular, was in the doldrums and not showing signs of the roar-back growth everyone seemed to be expecting, with anticipations that the U.S Federal Reserve would soon start raising interest rates.

No one gives me any prizes for being right (just as well, wouldn’t want to pay the penalties for when I’m wrong). But when the data came in for the first-quarter GDP growth in America, it was a lot worse than most folks expected.

Growth in Q1 was at an almost non-existent 0.2 percent annual rate.   Business spending on investment is down, inventories were up, and consumer spending slumped.

The good news is that the Fed is unlikely to raise interest rates soon in light of this performance.  The bad news is that after 8 years of “recovery,” the U.S. economy has yet to put together three or four solid quarters of strong growth.  We’re still waiting….

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Still Slow…

I have been blogging mainly about foreign policy during the last year.  Of course, there has been so much going on around the world — in Ukraine, the Middle East, and Hong Kong among other places, it has been hard to avoid.

Still, long-time readers may recall that three years ago I wrote an essay about the slow growth I expected in the US economy for a very long time.  We have had bursts of hope and quarters of growth, to be sure, but no consistent growth that would propel a true shift to strong economic vitality. Such gains in employment as we have enjoyed have not kept pace with overall population growth; rather the rate of unemployment has fallen because people have withdrawn from the labor force and stayed out.  As a recent review of the evidence noted, “were the same percentage of adults working or seeking work today as when President Obama took office, the unemployment rate would be 9.7%.”

In other words, there is no cause for celebration, and my prognosis of three years ago still looks on target.  The reasons why were laid out in that 2012 essay, and seem to have been borne out by events.

China’s economy has slowed down and continues to decelerate; Europe shows no signs of breaking out of its funk; and in the US productivity gains are not producing higher wages so demand growth remains sluggish.

We are now looking at the better part of a decade of slow growth (2007-2014);  I would not count on the next decade being much better, as these three big trends don’t seem headed for change.  Until they do, it’s hard to see how the economy could do much better.

When we see strong wage gains for U.S. workers for three consecutive quarters we might have a real recovery.  Until then, I think not.

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Yemen Undone

It shouldn’t really be a surprise to anyone that Yemen has collapsed (again).  A country that has split and been pulled together before, with the youngest and fastest growing population in the region, running low on oil and water, with a personalist government rather than stable institutions, it was on the top of every fragile state experts’ list as the state most likely to fail next.

What is surprising is that U.S. policy ignored all of this and insisted that simply drone-bombing Al-Qaeda terrorists was a policy that could keep Yemen intact and stable.  Indeed, when Obama pointed to U.S. policy in Yemen as an example of a “success” and a model for the plans that would roll back the Islamic State (IS), I shivered. Yemen does have value as a lesson — this is what happens when you ignore the basic foundations of social stability (legitimate leadership with stable succession plans; a united elite; institutions to bridge regional and ethnic divisions and assure fairness in political and economic access; a functioning economy with capabilities for providing employment and growth) and succumb to the illusion that precision-bombing or other surgical interventions to remove “dangerous elements” will sustain broader social and political stability.

So the collapse in Yemen should come as no surprise — current theories of revolution lay out the conditions for both social stability and political collapse, and anyone could see that the conditions for collapse were progressing in Yemen and that aerial attacks on Al-Qaeda terrorists would have no effect on them.  Those attacks were a side show — like firing an unpleasant band performing on the deck of an ocean liner while the hull is full of holes below waterline and taking on water fast.

What we have now is an area with about 24 million people (10 times more than IS now controls in eastern Syria and western Iraq) that is virtually ungoverned and up for grabs, that is falling into the grips of an all-out civil war between Iran-supported Shi’as  and Al-Qaeda/IS aligned Sunnis.  That is a war that the West loses no matter who wins.

It is now too late to do much of anything except watch and try to either support any moderate elements if they should emerge as capable of holding any regional or national power, or contain any dangerous jihadist elements if they should do so.  Either task will be difficult, and provide yet another costly distraction to efforts to restore peace in Syria and Iraq.

In other words, what has happened in Yemen, although predictable, is about the worst outcome imaginable for U.S. policy.  That America ever deluded itself into thinking it was pursuing a course that could lead to success could only be more frightening if that course — using air strikes to deal with the fundamental problems of fragile states — still reflects America’s thinking on how to address the crises of IS and failing states in the Middle East and north Africa.

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But not all sunsets are the same

A few days ago, I wrote that any deal with Iran on its nuclear program with a sunset clause would be a bad deal.

Perhaps I should clarify.  By a “sunset clause” I meant one that phased out most restrictions on Iran’s nuclear program without continued intensity of inspections and a clear sanctions/response that would continue after the sunset.  In other words, I am against the kind of sunset clause that rewards Iran with a promise of a reduced level of monitoring and response at a relatively near future date.

But there are other kinds of sunset deals, and here is one that would be acceptable:   IF Iran has complied with all conditions for 10 years, and IF inspections would continue unimpeded AND sanctions and other responses would continue to be automatically triggered by any discovery of higher-enriched uranium or undisclosed enrichment or fabrication facilities, and IF Iran has need for expanded civilian power generation and transparently lays out its plan for civilian nuclear power (including full compliance with international inspections of those facilities and their fuel cycle) THEN it would be permissible for Iran to start expanding the amount of uranium it enriches domestically to the 3-5% civilian use level to a volume reasonable to supply that specific need.

In short, the goal of a deal should not be to indefinitely deprive Iran of any opportunity to develop civilian nuclear power.  Such a deal would not be acceptable to Iran, nor consistent with the goals of the international non-proliferation treaty that Iran has signed.  Rather, the goal of any deal should be to limit Iran’s enrichment capacities for the near term, AND to ensure that ALL of Iran’s nuclear activities are subject to strict international scrutiny and inspections, and immediate punitive response, if they deviate from approved and transparent procedures.

For example, a treaty that specified that sanctions would be re-imposed automatically each year unless Iran received a certificate of compliance from the International Atomic Energy Agency, with no sunset clause for that item, would be OK even if it did allow for moderate increases in civilian-level enrichment of uranium after some future date.

What matters for weapons capacity is not how much 3-5% enriched uranium Iran has; what matters is how much industrial capacity (centrifuges) Iran has to raise that enrichment level to 20%+, and whether inspections and transparency are sufficient to detect that higher enrichment quickly.  Keeping capacity to reasonable limits and inspections active, and having strict and punitive responses to non-compliance with those limits and inspections, are the key.

Again, Iran should be willing to comply with any deal that will allow it to eventually develop a civilian nuclear energy industry (which does require 3-5% enriched uranium which is useless for bombs), even a deal that requires very strict inspections to ensure that none of that uranium is diverted for higher enrichment, and that auxiliary technologies for bomb making (detonators, lenses for focusing implosion) remain undeveloped.  That is, IF Iran is willing to conform to its avowed interest ONLY in civilian nuclear energy.

So I will say again that a good deal would be good for Iran, its people, the US, and the entire Middle East.  Let’s hope the negotiators do craft a good deal.   A bad deal would be a temptation, but one that must be resisted.

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