The GCC shores up Bahrain

Little noticed amidst the Gulf Cooperation Council (GCC) support for a U.N. no-fly zone in Libya on March 13th was another endorsement for the use of military force: deployment of GCC military and police forces to Bahrain. The choice of Gulf governments to have as their first military operation the repression of peaceful advocacy for political change is ominous. 

For the past two decades, American governments have encouraged the countries of the GCC to make good on the "cooperation" part of their organization. The overwhelming tendency of the governments of Saudi Arabia, Bahrain, the United Arab Emirates, Kuwait, Oman, and Qatar has instead been to criticize American policies in public while supporting them in private. Only with the alarming progress of Iran's nuclear programs has cooperation between GCC states advanced to include any significant military cooperation.

The GCC's Peninsula Shield Force was created to "deter, and respond to, military aggression against any of the GCC member countries." But the Bahraini government is not subject to military aggression -- it is under "attack" by its own citizens, peacefully protesting for political rights. 

In fairness, the government of Bahrain has offered an expansion of political rights in response to the protests. But as autocrats from the Shah of Iran to Hosni Mubarak could attest, offers that would earlier have mollified reformers can embolden resistance once the invisible line from reform to revolution has been crossed. 

The monarchies of the GCC states claim agitation for political change is the product of Iranian influence, an effort by to radicalize and destabilize their countries. And they may not be wrong about Iranian efforts: Shi'ia Iran has long sought to delegitimize those Sunni regimes, supported seizure of the Grand Mosque in Saudi Arabia in 1979, infiltrated Iraq to foment anti-government violence, and openly supported destruction by Hamas and Hezbollah. But the GCC governments deceive themselves about the depth of popular support for political change in their countries.

It is not clear if Bahraini government initiatives have come too late for political change to be successful in defanging the revolution. But it is clear that even as they support international action to assist rebels in Libya, the autocrats of the Gulf Cooperation Council will cooperate to repress peaceful dissent in their own countries, and that will make their governments more brittle and unreliable as partners for the United States. It matters that GCC governments acted in concert, because it now aligns them all against peaceful political change. And they will be utilizing American and European military equipment and training to repress their own citizens. That really is a victory for Iran.


Shadow Government

Economic aftershocks: 4 big repercussions

A calamity like Japan's massive 9.0 earthquake last week is certain to rock Japan's economy and, in turn, global commerce. There is no good way to put a number on this coming shock, though one early assessment was the fall of more than six percent in Japan's Nikkei stock market index on Monday.

Instead, we can sound a general alarm and suggest where the impacts are most likely to appear. Here are four broad areas likely to see significant repercussions:

Several years ago, there was talk of whether Asia's flourishing economies had "delinked" from the consumer-driven economies of the West. That talk faded away with the global financial crisis. A sharp downturn in the United States and Europe depressed global trade and buffeted Asia.

Now the question is how shocks are transmitted from Asia back to the West. Japan, a trade surplus country, has not been a major source of net demand for the world economy. But it is tightly interwoven into the global manufacturing network. It demands parts from around Asia and the rest of the world and is a supplier of key components. Thus, when Japanese factories shut down and supply chains are temporarily broken, this could well leave factories elsewhere with either a slimmed-down order book or with critical ingredients out of stock.

The nuclear plant crises that followed the tsunami damage have inevitably rekindled debates about the safety and desirability of nuclear power. These debates come at a time of high oil prices and a sustained push to move away from carbon fuels for environmental reasons. The problem is that modern economies run on energy, demand is expected to boom, and there are a finite number of economically viable alternatives. There have been arguments that rational economic calculations will drive decisions and that we just need to be cautious about the design maintenance and siting of nuclear reactors. As we all familiarize ourselves with the various degrees of nuclear plant meltdown, it will be interesting to see if the debate remains this dispassionate. A turn away from nuclear energy would effectively curtail global energy supplies in the medium to long run and have a negative effect on global growth.

Political economy
Several weeks ago I was in Tokyo at an economic conference. Some distinguished Japanese described economic reforms they felt the country should undertake (e.g. budget moves, trade liberalization for the agricultural sector) but questioned whether Prime Minister Kan would even last a month in office.

One way or the other, this persistent debilitated state should change sharply in the near future. Prime Minister Kan's feeble government has been presented with enormous challenges. If it handles them deftly, support for the government could build. If it stumbles, that increases the odds of a quick fall. In either case, there will be ramifications for the role Japan plays in undertaking G20 commitments, crafting an agreement at the World Trade Organization, or joining the Trans-Pacific Partnership.

Macroeconomics and deflation
Japan has experienced slow growth and deflation for roughly two decades now. How to interpret this experience is something of a Rorschach test for economists. The Japanese case is simultaneously held up as an example of how ineffective Keynesian stimulus policies are ("look how much they spent and what little they have to show for it!") and of the validity of Keynesian analysis ("they raised taxes and never spent enough!").

Whatever the interpretation, Japan has built up an extraordinary pile of public debt (approximately 200 percent of GDP) and has nonetheless managed to remain in an extended deflationary slump. This puts Japan in an odd position as it faces massive rebuilding costs. On the one hand, this looks like a burst of needed economic activity (fixing Bastiat's figurative broken windows). On the other hand, the prospect of borrowing more money looks daunting, given the enormous debt burden. But it has been unclear for years why Japan would not monetize its debt and just print money. It has provided the world's leading recent example of a liquidity trap (interest rates stuck at zero) but it has always had the ability to do its version of quantitative easing. It could print yen and buy foreign currency.

There are two standard arguments against doing this. First, printing money tends to cause inflation. After the last two decades, though, Japan could use a little inflation. Second, Japan could be accused of currency manipulation. Yet the yen has appreciated from 123 yen/dollar in June 2007 to 81 yen/dollar now.

After the 1995 Kobe earthquake, money flooded back into Japan and the yen rose. Today, in the wake of last week's quake, the Bank of Japan poured the equivalent of over $180 billion into money markets to ease concerns. That was not an explicit move to depreciate the currency, but Japan may well be faced with the choice of whether to allow the yen to rise as money repatriates or to break out of its slump by depreciating the currency.

There are more questions than answers about how a shaken Japanese economy will respond to last week's quake. Given Japan's central position in the global economy, the economic shock waves can be expected to emanate out from the epicenter like their physical counterparts.