The failure of the latest round of negotiations over Iran's nuclear program will likely bring calls for changes in the American approach -- for bilateral engagement, for an "endgame proposal," or even for reconsideration of the merits of "containment" of a nuclear-weapons-capable Iran. One such proposal -- focusing on strengthening the US "diplomatic track" with Iran -- was put forward recently by The Iran Project, a group of distinguished former U.S. officials.
There is much in the report with which I agree. In particular, the report is correct to observe that neither sanctions nor engagement alone will accomplish U.S. aims and that a combination of policy tools will be required. It is also right to begin with an assessment of U.S. and Iranian interests and objectives, which should be the starting point for any successful policy.
However, I would differ with the report on four vital issues and thus reach different conclusions regarding the way forward on Iran policy.
First, the report conflates the objectives and interests of Iran writ large with those of the Iranian regime. The principal-agent problem that bedevils even democratic governments is particularly pronounced in authoritarian regimes, such as Iran's, which are not accountable to an electorate. Care must therefore be taken to distinguish between Iranian national interests and regime interests.
When it comes to sanctions, the Iran Project report's own conclusions illustrate this distinction -- the economic costs imposed upon Iran have certainly set back Iran's national interests but have had little apparent impact on the regime's own calculus, likely in part because Iran's leaders are relatively sheltered from the impact of sanctions compared to ordinary Iranians.
This distinction must also, however, be applied when designing incentives. What the report lists as Iranian aims -- respect, acknowledgement of nuclear "rights," etc. -- appears based on the rhetoric of regime officials. That rhetoric has multiple audiences in mind -- especially public opinion in Iran and the Middle East -- and therefore deliberately obscures the gap between the interests of the regime and those audiences. An examination of Iran's policies and actions, on the other hand, suggests that the regime is primarily interested in the enrichment of regime elites, the projection of power throughout the region to ward off potential foes, and especially in the survival of its "velayat e-faqih" system of rule.
Second, the report draws a false distinction between "diplomacy" and "pressure." There is a widespread misconception that diplomacy means "being nice," which leads to engagement being seen as a reward. In fact, diplomacy is just the conduct of relations between states -- a means of communication. A skilled diplomat will use these communications both to pressure and to entice, as well as to learn about his counterpart. Whether any particular action constitutes a disincentive or incentive depends on whether it damages or advances the Iranian regime's interests, which is why understanding how the regime truly views its interests is critical to diplomatic success.
Third, the report treats Iran's nuclear ambitions as the result of U.S.-Iran hostility. In reality, both likely arise from the regime's desire to preserve itself. Anti-Americanism was a founding pillar of the current Iranian government, and abandoning it would undermine the regime's raison d'etre. As for nuclear weapons, they would under the right conditions provide Iran with a powerful deterrent to external attack. Furthermore, the regime may calculate -- based on U.S. policy toward North Korea during its recent leadership transition, as well as U.S. policy toward Pakistan -- that fears of "loose nukes" would cause outside powers not simply to be deterred, but give them a vested interest in the regime's stability. Because the threats to that stability emanate from within as well as without, Western security guarantees are unlikely to be regarded as an acceptable substitute for a nuclear arsenal.
Fourth, and most problematically, the report assumes that a nuclear agreement could result in a broader strategic shift by Iran. In fact, a nuclear agreement -- and any improvement in U.S.-Iran relations -- is more likely to be a consequence of such a shift than a cause of one. As noted above, both Iran's nuclear ambitions and its hostility toward the West are elements of a strategy to advance the regime's interests, as it conceives them. For a strategic shift to occur, the regime must be convinced that this strategy is no longer tenable.
Far from compelling the regime to rethink its strategy, however, the current Western approach is likely seen in Tehran as vindicating it. U.S. policies at the negotiating table and across the region -- a reduction in our military posture, our inaction in Syria, and our continually improving nuclear offers -- are interpreted as successes by the regime and perceived by it as indications not of good will but of desperation or decline.
Seen in this light, rather than forcing the regime to face a stark choice, the U.S. and our allies have given Iran's leaders the impression that they can have their cake and eat it too: retain an implicitly acknowledged nuclear weapons capability and not only maintain but expand its regional influence without having to adopt a posture of international cooperation.
The U.S. objective, therefore, should be to reverse this dynamic. Such an approach would require a firmer posture in the nuclear arena -- refraining from further improvements to our offer, setting red lines for Iran's nuclear program, taking steps to enhance the credibility of the U.S. military threat, and leaving open for now the question of whether we will hold further talks.
But it would also require putting the nuclear negotiations in their appropriate regional and strategic context. The regime should come to believe that a confrontational, rather than cooperative, approach to its own security will come at a price, exacted by the U.S. and our allies. There are a number of ways to send this message -- pushing back against Iranian support for terrorism, greater support for the Iranian opposition -- but the most important way to do so is through greater involvement in Syria, where Iran has much at stake.
None of these steps exclude continued or even intensified diplomacy. Successful policies should combine a range of tools employed in coordination. But the goal of all of these actions should be the same. A strategic shift by Iran -- from a zero-sum policy of confrontation to one of cooperation -- would benefit the U.S. and the region whether or not a formal nuclear agreement is reached. A nuclear agreement without such a shift, however, will prove a hollow achievement.
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The policy world has turned on Ken Rogoff and Carmen Reinhart with a vengeance. The two are the celebrated authors of multiple studies showing that very high levels of government debt have historically been associated with slower growth. After a review of one of their articles revealed a spreadsheet mistake, the ever-temperate Paul Krugman was driven to ask: "Did an Excel coding error destroy the economies of the Western world?"
John Maynard Keynes once said that "even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist."Apparently, this bondage is felt even more acutely when those practical men are in the thrall of a living, breathing pair of economists. Now that Rogoff and Reinhart have been discredited, the thinking seems to go, the masses who had been suffering under the yoke of austerity are now free to spend as they had always wished.
There are a number of reasons to see this as an overreaction. The episode is a bit analogous to a researcher finding that a daily Twinkie adds 10 pounds over a year. A subsequent study finds that, with different methodology, a daily Twinkie might add only 5 pounds over a year. Then the baying pack howls that they knew Twinkies were good for you all along, they abjure dieting, and stuff themselves with cake and cream filling. [Reinhart and Rogoff respond to the criticisms and put the dispute in the context of a broader literature without resorting to any talk of dessert cakes.]
An odd strain of the discussion has been the implication that the only restraint on unbounded budget deficits has been the Reinhart-Rogoff admonition that it could slow economic growth. In fact, there are other constraints. How much can Portugal or Greece or Cyprus spend beyond current tax revenue? They can spend the money they have in savings (negligible) plus the amount they can borrow in the open market (negligible) plus the amount that other countries or international financial institutions (IMF, ECB) are willing to lend them. The limitation, then, is not Harvard researchers' findings but rather the willingness of other leaders to risk their funds, as their thoughts teem with admonitions about "sending good money after bad."
Of course, countries such as the United States, France, or the UK can borrow on open markets. That does not free them from all non-academic constraints, however. If borrowing is excessive, a country begins to look riskier. The United States was downgraded in 2011, France in 2012, and the UK last week. Even the IMF, cheering now for a spending boost, has argued for offsetting medium-run budget cuts.
The Reinhart-Rogoff episode has prompted deeper ruminations about how grounded our economic beliefs really are. In the Wall Street Journal, Carl Bialik elicits a confession from the editor of the American Economic Review that peer review rarely involves line-by-line checks of authors' calculations. Bialik lays bare some of the inherent vagaries of working with historical macroeconomic data -- there are no controlled experiments and the numbers can be unreliable.
It is thoroughly healthy to review the limitations of empirical macroeconomics. It is the part of economics that deals with the most moving parts and has the least opportunity to isolate treatment effects from confounding variables. Economics does far better as a field when conditions are more favorable -- predicting how an auction will work, for example. Yet citizens and policymakers want to know what will happen with inflation, unemployment, and growth, and how these will be affected by government spending, taxes, and the money supply. These are all macroeconomic questions.
Let's stipulate, then, that macroeconomic point estimates should be treated as somewhat fuzzy. That was always acknowledged in the formal economics (standard errors), but it does not usually make for good newspaper copy. If multiple studies, using different data sources and different techniques, find similar results, then we will have steadily more confidence in those findings. This has always been true too, though in public debate participants tend to prefer a single bold study to a lengthy lit review.
The newfound caution about macroeconomic findings has, so far, been curiously selective. Foes of austerity argue that, after slaying the dreaded Reinhart-Rogoff result, they are not even bound by warnings of credit downgrades. After all, if only we adopt new fiscal stimulus, it will promote growth and pay for itself (debt/GDP will fall as GDP rises faster than debt).
How do we know this? Why should we believe that the stimulative effects of new spending will overcome people's worries about the new taxes that will inevitably follow? How can we calculate how much stimulus is appropriate? Are tax cuts or spending increases more appropriate? If we do not see booming economic growth after stimulus has been tried, how will we know that the stimulus was worthwhile, that it saved us from an even worse fate?
We have macroeconomic findings. Precisely calculated macroeconomic findings. Based on historical data. Published in peer-reviewed journals. Worked out on spreadsheets. Let the spending commence.
While America's attention has been drawn to last week's terrorist attack upon Boston, events in North Korea continue to be cause for concern. The revelation last month that North Korea has taken "initial steps" to deploy a mobile intercontinental ballistic missile, the KN-08, and the disclosure earlier this month that at least part of the U.S. intelligence community believes "with moderate confidence" (in intel-speak) that it possesses the ability to deploy a nuclear warhead atop the missile highlight the threat that Pyongyang poses to the United States.
It should come as no surprise that North Korea possesses, or will soon possess, the ability to strike the United States with a nuclear-armed ballistic missile. After all, U.S. government commissions, U.S. and foreign intelligence agencies, and defense analysts have been warning of this eventuality for more than a decade. Pyongyang has been working on nuclear warheads for two decades and has conducted three nuclear tests. Both Israel and South Africa, by contrast, developed nuclear warheads for their missiles without conducting any nuclear tests. Moreover, as Peter Pry noted last week, the United States has possessed for more than fifty years nuclear missile warheads smaller and lighter than the satellite that North Korea lofted in December.
Skeptics will argue that North Korea has yet to demonstrate it has the ability to deploy nuclear warheads atop its ballistic missiles. Fair enough. But policy makers should not have to wait for Pyongyang to test a nuclear-armed ICBM to respond -- particularly when countermeasures are likely to take years to come to fruition.
The very real threat posed by North Korea has thrown into sharp relief the Obama administration's zig-zagging on missile defense. After coming to office, Obama's team scrapped the Bush administration's missile defense plan, putting in place the Phased Adaptive Approach that promised to deliver more effective missile defense based upon yet-to-be developed interceptors such as the Standard Missile 3 IIB.
Some analysts suspected at the time that the Obama administration was engaging in a game of bait-and-switch, junking a missile defense system based upon proven technologies in favor of a supposedly better one down the line that it would then fail to fund. It thus came as something less than a surprise when, in a move largely missed by the major news outlets, last month Secretary of Defense Hagel announced the cancellation of the final phase of the missile defense plan while promising to beef up the Bush-era missile defense site at Fort Greely, Alaska. These interceptors will not be deployed until 2017, however.
Enhancing U.S. missile defenses in response to North Korea's nuclear missile program would appear to be warranted, but it alone is likely to prove insufficient. The United States should consider enhancing its ability to strike North Korea, including its leadership and its ballistic missile launch infrastructure. As former Secretary of Defense William Perry and current Deputy Secretary of Defense Ashton Carter wrote on June 22, 2006:
"Should the United States allow a country openly hostile to it and armed with nuclear weapons to perfect an intercontinental ballistic missile capable of delivering nuclear weapons to U.S. soil? We believe not."
Perry and Carter went on to argue in favor of a pre-emptive strike on a North Korean test missile on the launch pad. It would be worth asking Carter whether he continues to hold this view.
Finally, the United States should explore ways to enhance its extended nuclear deterrent of its allies, particularly South Korea and Japan. The Obama administration's 2010 Nuclear Posture Review scrapped the nuclear variant of the Tomahawk missile, which Tokyo looked to as the embodiment of the U.S. nuclear guarantee, and yet is years away from fielding the variant of the F-35 strike aircraft that will be capable of carrying nuclear weapons. Reassuring U.S. allies in the face of North Korean nuclear threats is likely to be both vital to stability in the region and an increasingly challenging task.
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Once again, international events are intruding upon the administration's determination to focus on domestic policy. To no one's surprise, except perhaps, that of the White House, Iran once again has signaled that it is not interested in serious negotiations unless all sanctions, presumably to include those imposed for its support of terrorism and violations of basic human rights, are lifted forthwith. In the meantime, North Korea's secular monarch, Kim Jong Un, has sparked a new crisis on the peninsula by ratcheting up his nation's bellicosity to fever pitch. And lastly, the Syrian government appears to have at last resorted to the employment of chemical weapons against the forces of the opposition, thus crossing the "red line" that President Obama drew some time ago.
The administration's response to Iran's predictable behavior has also been predictable: regret and not much more. Its response to North Korea has been more forceful: carrier, missile defense ships and stealth bomber deployments, as well as a boosting of the missile defense budget and joint exercises with the Republic of Korea forces. But it remains unclear, to the American public, the international community, and North Korea itself, how Washington might respond if Pyongyang begins to match its words with deeds.
As for Syria, the Pentagon has deployed about 200 troops from the 1st Armored Division to Jordan, a putative "vanguard" for a larger force that would enter Syria to secure that country's chemical weapons. But if, as Britain and France assert, Bashar al-Assad is already employing these weapons, it is not at all clear how an attempt to "secure" them might actually succeed. Would it be enough to send the 1st Armored Division, with its more than 300 tanks, into Syria? Would they not themselves face the likelihood of a chemical attack by Assad's forces? How would the Syrian population react to the appearance of American tanks inside their borders? Will they be welcomed as "liberators," as they were, all too briefly, in Iraq? And then what?
Moreover, it is highly unlikely that American land forces would enter Syria without the U.S. Navy and/or Air Force launching strikes to destroy Syrian air defenses and ground facilities, and to weaken its land forces. In other words, America would go to war in Syria.
Perhaps Britain and France would join the American operation, though it is unlikely they would lead it as they did in Libya. They simply do not have the resources, and perhaps the willpower to do so. So at the end of the day, the United States would have launched its third major war against a Muslim state since the beginning of the century. And, as with Iraq and Afghanistan, and indeed, the lesser Libya operation, for which Washington provided more support than was originally acknowledged, the consequences of such an attack cannot be foretold, and could well be negative.
In any event, it is not at all clear that Washington will in fact invade Syria. The last thing this administration wants is to invade another Arab state. Moreover, any additional forces deployed to Jordan could well be needed not only to assist with humanitarian activities, but also to ensure the stability of that American ally. About a half million refugees have already poured across the Syrian-Jordanian border, and some, perhaps many, of them could well be affiliated with Islamist extremists who are sworn enemies of the moderate, pro-Western King Abdullah. In the meantime, however, Assad would continue to employ chemical weapons as and when he deems it is useful to do so.
How then should Washington respond to the latest developments in Syria? Some suggest imposing an aerial no-fly zone near the Turkish border, and perhaps another near the Jordanian border. Others suggest a no-fly zone under the umbrella of Turkish-based Patriot missiles (assuming the Turks agree, of course). Yet no-fly zones will have little impact on the struggle that is taking place inside Syria apart from that between the regime and the opposition. In the conflict, between, on the one hand, Islamic extremists supported by the Qataris and to a lesser extent the Saudis, and, on the other, the moderate opposition, it is the extremists that are gaining the upper hand. Should the regime fall, and the extremists come to power, they will pose a new, and more immediate threat to both Israel and Jordan. Indeed, such a regime might well choose to align itself with Iran as well; after all, Hamas has received Iranian support ever since it came to power in Gaza. Washington's first priority, therefore, should be to ensure that the extremists do not control a post-Assad government. To do so, it must arm the moderate opposition. And it must do so now; time is not on the side of the moderates; indeed, as the revolutions and civil wars of the past, from the French to the Russian revolutions have demonstrated over and over again, time is rarely, if ever, on the side of the moderates.
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[Update: Last night, Venezuelan electoral authorities agreed to a partial audit of Sunday's vote, although not the full recount demanded by challenger Henrique Capriles.]
After an ill-advised overture to Hugo Chávez's government last November, the Obama administration has regained its footing with a strong, principled stance on Venezuela's contested election. Based on the razor-thin margin and opposition protests of irregularities, the administration has yet to recognize as the winner Vice President Nicolas Maduro, Chávez's anointed successor, and has instead supported a review of the vote count.
In appearances before both the House and Senate in recent days, Secretary of State John Kerry re-affirmed that position "so that the people of Venezuela who participated in such a closely divided and important election can have the confidence that they have the legitimacy that is necessary in the government going forward."
He said, "I don't know whether it's going to happen. ... [But] obviously, if there are huge irregularities, we are going to have serious questions about the viability of that government."
Kerry's statements brought the predictable howls of protest from Venezuela. "It's obscene, the U.S. intervention in the internal affairs of Venezuela," Mr. Maduro said. "Take your eyes off Venezuela, John Kerry! Get out of here! Enough interventionism!"
But no one should be intimidated by such false bravado.
Maduro is in a panic. He knows he cannot handle declining socio-economic conditions in the face of a reinvigorated opposition, dissension in his own ranks, and an engaged U.S. government standing firm on principle regarding the legitimacy of his election.
Of course, the administration will face a vociferous public campaign by chavista sympathizers pressuring it to accept Sunday's disputed result. Already, the feckless Organization of American States Secretary General José Miguel Insulza has backtracked from the organization's initial strong statement on behalf of a recount and now has accepted the result.
Recognition proponents will tell us the United States faces "isolation" in the region if the administration doesn't recognize Maduro (only Panama and Paraguay have joined the call for a recount) and that its supposed intransigence plays right into Maduro's hands, allowing him to whip up nationalist sentiment.
Nonsense. Those proposing such arguments fail to recognize that governments are pursuing interests. Certain countries such as Brazil, Colombia, and even Russia and China, have benefited greatly from economic ties with Venezuela under Chávez and their short-sighted view is to try and keep that spigot open.
Most citizens throughout the region, however, tend to be more appreciative of principles, such as the security and integrity of one's vote. One can be sure that, in case of a disputed election in their own country, they would hope to count on external support for an honest accounting in their own electoral processes.
Secondly, as the election just demonstrated, Maduro is not Chávez, and his capacity to whip up anything but official violence against Venezuelans protesting in the streets is extremely doubtful (Warning: graphic photos here). In short, no one should be misled by the noisemakers.
A continued firm stand on behalf of a clean election will resonate positively throughout the region, sending a strong signal to all democrats that the United States does indeed care and that intimidation and violence have no place in any democracy. It is not likely that such sentiments will sway Maduro and his Cuban advisors to accept any sort of recount, but it will certainly place the United States on the right side of the debates and confrontations to come.
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This Saturday, Iraqis head to the polls to vote for provincial councils -- the country's first elections since U.S. troops withdrew sixteen months ago. The balloting comes at a time of growing peril for Iraq. Violence is escalating, as are tensions pitting the Shiite-dominated government of Prime Minister Nouri al-Maliki against the country's Sunni and Kurdish communities -- all exacerbated by the raging civil war in neighboring Syria. While posing a stern test to the viability of Iraq's democratic system, the elections will also serve as an important indicator of the relative strength of Iraq's competing coalitions -- especially Maliki's -- in advance of national elections scheduled for 2014.
At stake are nearly 450 seats on local governing bodies. More than 8100 candidates from some 265 political entities are competing. The elections cover 14 of Iraq's 18 provinces. The three provinces comprising the Kurdistan Regional Government will vote later this year, while elections in oil-rich and ethnically disputed Kirkuk have (by tacit agreement among the competing communities) not been held since 2005.
But in a highly controversial move, Maliki's cabinet decreed in March that balloting would be delayed by up to six months in Iraq's two most influential Sunni-majority provinces, Anbar and Nineveh -- both of which border Syria and have for months been the locus of large-scale (but mostly peaceful) anti-Maliki protests. Maliki claimed -- not entirely without justification, especially in Anbar -- that he was simply responding to the petition of local leaders worried that voters could not be adequately protected from growing collaboration between al Qaeda affiliates on either sides of the Iraq-Syria border.
His opponents charge that the prime minister's real agenda is avoiding a massive anti-Maliki turnout that would further escalate opposition to his government. They correctly note that previous elections were conducted under far more threatening conditions. Both the U.S. and U.N. urged Maliki to reverse course, worried about the appearance of disenfranchising millions of Sunnis already agitated by claims that Maliki has been systematically moving to marginalize their community in the interests of establishing an Iranian-backed Shiite dictatorship. Maliki turned aside these criticisms, while suggesting the delayed elections might occur as early as May.
The reality is that violence threatens voting throughout Iraq. A series of more than 20 terror attacks on Monday hit targets across the country, including prospective polling places, killing Sunnis and Shiites alike. These were but the latest in a string of al Qaeda-linked assaults that have occurred at increasingly regular intervals. The campaign has also been marred by at least 15 candidate assassinations, all of them Sunnis and many believed to have been killed not by Al Qaeda but by political rivals within their own community.
Whether Iraqi security forces can successfully protect the elections without the support previously provided by tens of thousands of U.S. troops is a major question mark. The fact that close to 700,000 army and police officers went to the polls in early voting last Saturday without incident was encouraging. Also of concern, however, is the possibility that the mere threat of violence could significantly depress turnout, stoking doubts about the legitimacy and future of Iraq's shaky democracy. An especially important indicator could be the participation of Sunnis -- a potential barometer of that disgruntled community's continued commitment to the post-2003 political order or, alternatively, a troubling sign that, perhaps inspired by co-religionists in neighboring Syria, they are looking to more confrontational methods to redress their grievances.
Beyond violence, ensuring the integrity of the electoral process has to be a real worry. There is no doubt that America's heavy involvement during past elections helped deter fraud to a minimum. Absence that involvement, the risk of widespread wrongdoing -- or simply the perception of wrongdoing -- increases dramatically, even with the presence of a few hundred international observers and several thousand domestic monitors. The danger that significant swaths of the public may simply reject the legitimacy of the results cannot be discounted.
Assuming a relatively free and fair vote, the outcome of Saturday's elections is hard to predict. No reliable polling is publicly available. Maliki has confidently claimed that his coalition will win big. In recent weeks, he has shrewdly sought to divide his Sunni opposition (including through a surprising set of proposals to ease de-Baathifcation laws), successfully co-opting stalwart nationalists like Deputy Prime Minister Saleh Mutlaq. The Iraqiya bloc of his main rival, former prime minister Ayad Allawi (a secular Shiite), has splintered, with the current speaker of parliament, Osama Nujaifi, and the former finance minister, Rafi Issawi, forming their own Sunni-based coalition.
Nevertheless, surprises remain possible. In local elections, a voter's familiarity with a hometown candidate can often trump allegiance to a national party. In provincial balloting four years ago, Iraqis voted to punish incumbents -- an inclination that if repeated on Saturday could well work against Maliki and to the benefit of his major Shiite rivals in the Islamic Supreme Council and Sadrist camp -- both of which are fielding their own candidates. For all his troubles, Allawi's bloc is the only one competing in all Iraq's provinces, both Sunni and Shiite, a nationalist vocation that could well accrue to his benefit. And even if Maliki's State of Law emerges as the top vote getter, post-election coalitions among his opponents could emerge that deny him the degree of local domination that he seeks.
Should Maliki nevertheless secure an overwhelming victory, it will likely fuel fears that his most worrisome authoritarian tendencies will be emboldened: more consolidation of control over key state institutions, particularly the means of coercion and the courts; more targeting and exclusion of political opponents; an intensified effort to resolve disputes with Iraq's Kurdish and Sunni minorities through confrontation; and increased dependence on Iran. Maliki's chances of winning next year's national elections, another four years in office, and increasingly unconstrained powers would increase significantly. Should such fears be realized, the results for Iraqi stability and unity could be dire indeed -- especially in a regional context of dramatically heightened sectarian and ethnic tensions, perhaps leading to all-out state collapse in next-door Syria.
From that standpoint, Iraq's future may be best served if Saturday's elections see not only minimal violence, maximum participation, and limited irregularities, but also no clear winners and losers -- a triumph not only of the democratic process, but a therapeutic re-balancing of Iraq's political landscape that reminds all parties of the continued imperative of negotiation, compromise, and political partnership.
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Yesterday the IMF chided the United States and the United Kingdom for their recent pursuit of austerity. The organization released its latest World Economic Outlook in anticipation of the annual World Bank-IMF spring meetings in Washington, when global financial dignitaries gather.
The IMF put forth top officials to discuss the organization's forecast -- which I'll take up in another post -- and also to critique the state of fiscal affairs in major countries. Carlo Cottarelli, the director of the IMF's fiscal affairs division, described 10 economies with serious fiscal problems -- debt in excess of 90 percent of GDP and rising. These 10 -- the United States, Japan, the UK, France, Italy, Spain, Belgium, Greece, Ireland, and Portugal -- account for 40 percent of world GDP (for all the headlines they draw, Greece, Ireland, and Portugal account for very little of that global GDP).
Cottarelli warned that there were numerous studies indicating that when debt hit 80 to 90 percent of GDP, growth would suffer. This seemed an oblique reference to the bubbling controversy over the work of Ken Rogoff and Carmen Reinhart. Count the IMF in the camp that think Rogoff and Reinhart are basically right. Cottarelli's conclusion, given his reading of the broader evidence, was that a country should not seek to stabilize debt/GDP at the 90 percent level, but rather should aim for significantly lower levels of debt.
While that might seem to support a call for austerity, the IMF's short-term policy conclusions were just the opposite. As the Wall Street Journal reported it:
"...the International Monetary Fund on Tuesday called on countries that can afford it -- including the U.S. and Britain -- to slow the pace of their austerity measures ... it warned euro-area policy makers against focusing too much on hitting tough deficit targets, saying they risked further deepening their downturn. ‘Fiscal adjustment needs to proceed gradually, building on measures that limit damage to demand in the short term,' the IMF said."
There were two interesting caveats to this call, however:
1. This recommendation to back off austerity only applied to countries that are not currently subject to market pressures.
2. Short-term easing needs to be paired with credible medium-term restraint. (Borrow more today; pay it back tomorrow).
Those caveats are critical and raise all sorts of questions. Fortunately, I was at Cottarelli's press conference and got to ask.
Take the "market pressures" exception. You know a country is experiencing "market pressures" when that country's bondholders are panicking, a debt sell-off is underway, and interest rates on sovereign debt are soaring. When no one wants to buy or hold your debt, it is an awkward time to try issuing more. On this, there is broad agreement.
But how do you know when investors are about to lose faith in your debt? Is there any reason to expect advance warning? When should preparations begin?
Cottarelli's response was that we do not really know in advance. We have to guess. There are some indications of vulnerabilities -- a country whose debt is held more by international investors is more vulnerable -- but it's an art, not a science.
An honest but unsatisfactory reply. It does little good to say that we know market pressures when we see them. Once the market has turned on your debt, it's too late. Budget processes are slow, with long lags from initial discussion to actual spending. If interest rates were to spike on U.S. debt in September 2014, borrowing for that time period is covered by the budgets currently under discussion in Congress. And, for the record, Federal Reserve data show that in 2011 roughly 46 percent of U.S. debt was held by international investors.
On the question of repaying additional short-term borrowing with medium-term frugality, I asked about judging the credibility of fiscal plans. The U.S. fiscal stimulus of 2009 was supposed to be a temporary measure, but worked itself into spending baselines. Congress regularly adopts measures that ‘balance' 10-year budgets, only to repeal those measures when the time comes. A classic example is the attempt to cut payments to Medicare providers, requiring a regular "doc fix" when it turns out there is a limit to the pro bono services doctors will provide. So how do we know that medium-term promises are credible?
Cottarelli suggested that a first step was to look at whether a plan contained sufficient detail. Beyond that, though, he acknowledged it was a much more difficult issue. His recommendation was to look at a country's past record of implementing fiscal adjustment.
Other than the recent austerity, to which they object, it was unclear which episodes in recent British or U.S. fiscal history offer reassurance on this count.
The rationale for the IMF's call to set aside austerity is pretty clear -- large parts of the world are slumping, central banks are doing all they can on the monetary side, so the IMF would like to see a boost to demand through looser fiscal policy (lower taxes or higher spending). The Reinhart-Rogoff controversy is a sideshow here. The IMF is not embracing ever-rising debt levels; it is pushing select countries to adopt a temporary slump-busting burst.
Yet if one runs through the IMF's own check-list of pre-requisites for short-term relaxation -- current debt at sustainable levels; freedom from worry about a market panic; credible medium-run plans for cuts -- none of them seem to apply. The IMF prescription appears less a careful calculation than a double gamble. It is a bet that further short-term measures are appropriate to address a slow-down that has now dragged on for five years, and also a bet that those who adopt the prescription will not have to pay a hefty price down the line.
Stephen Jaffe/IMF via Getty Images
The World Bank's most successful program -- "Doing Business," which ranks countries on the ease of starting and running a formal business -- has helped spark major free market reforms in over 100 countries during its 10 years of existence. It serves as a major "strategic conversation starter" for American diplomats, makes it easier for entrepreneurs to get access to bank loans, increases the number of business start ups in developing countries, and helps governments bring companies out of the gray economy into the formal economy. But it now is in danger of being weakened, outsourced, or done away with.
So why would anyone dislike Doing Business? Countries that rank poorly compared to their geostrategic rivals (such as China, India, or Argentina) or don't believe in free markets and the private sector as the primary driver of prosperity tend to dislike the index. This has resulted in an unfortunate effort inside the World Bank to do away with the index.
Doing Business reflects a broadly American and widely accepted view about development -- that the private sector is its main driver. A small number of influential, vocal countries on the board of the World Bank such as China, Brazil and India dislike where they end up on the DB rankings. As a result, they have called on bank management to change the methodology of the report to reflect aspects that they can perform more highly on and to stop ranking countries according to the ease of doing business. In addition, several quarters are calling for the World Bank Group to give the Doing Business project to another institution.
Jim Kim became the new president in July 2012, and with his ascent, anti-reform forces within the bank's bureaucracy and on its board sensed their chance to kill, cripple, or "outsource" the index. After a messy board meeting last summer where no consensus was reached, Jim Kim punted and convened a panel to review Doing Business. That panel is expected to release a recommendation about the fate of Doing Business in May or June. This weekend the World Bank hosts its spring meetings, and Doing Business will be one of the hot topics of conversation t. For my day job, I am hosting an event on Friday morning to recognize the 10th anniversary of the report. The World Bank cancelled a large research conference last December following the 10th release of the report because of the review and the "controversy" around the index.
Doing Business ranks countries by how hard or easy it is to start a "formal' (tax-paying, bank loan-taking) business. In many countries, setting up a business "by the book" can cost tens of thousands of dollars and conceivably years of fighting red tape. But operating in an informal economy is bad for prosperity: no access to bank loans, many opportunities for bribes, and less folks paying any taxes at all. Doing Business was incubated with strong support from the Bush administration through contributions to the methodology from USAID, funding from USAID, and political support from State and Treasury. The last three World Bank presidents, especially Bob Zoellick, were strong supporters of Doing Business.
The fact that the World Bank releases an annual ranking gives Doing Business power and influence in unique ways because of the bank's pull in developing countries. Attempts to "outsource" Doing Business to an academic institution will greatly reduce the power of the index.
At a time when the Obama administration and development thought leaders speak about the importance of funding activities that are "evidence based" and "data driven," the data and facts generated by the Doing Business indicators are undeniable and powerful. The data creates the ability to compare countries and local governments across jurisdictions and have made it possible to systematically study the effects of regulations and red tape on private enterprise. Reforms empower entrepreneurs and takes power from crony capitalists.
To the administration's credit, they have supported Doing Business but could use some help from Republicans. Through Congressional action, Republicans need to weigh in with the administration (especially the Treasury Department) and with the World Bank's leadership.
This is a great bipartisan opportunity for the chairman and ranking members of the Senate and House Appropriations, Foreign Relations, and Financial Services Committees to take action to support a pro-business development agenda. Because the World Bank should be a force multiplier of American influence in the world, Republicans supported (and rightly so) the renewal of the general capital increase of the World Bank. In return for supporting the GCI, the U.S. should be expected to retain its "big seat" at the table and exercise that influence with Jim Kim and bring in allied shareholders in favor of strengthening Doing Business. Killing, crippling, or outsourcing the index to another institution is one of the worst things the World Bank could do and would be a direct rebuke to the bipartisan support that the World Bank receives.
The U.S. renewed its commitment to the World Bank through the GCI, and it is time for the World Bank to renew its commitment to a proven program that supports free markets, cuts corruption, and empowers entrepreneurs.
SAUL LOEB/AFP/Getty Images
Shadow Government is a blog about U.S. foreign policy under the Obama administration, written by experienced policy makers from the loyal opposition and curated by Peter D. Feaver and William Inboden.